Thursday, August 11, 2011

Choose Your Momentum Stocks Wisely

Some momentum tech stocks have really fizzled this year: Akamai (AKAM -commentary - Trade Now) is down 52% year to date, Juniper (JNPR - commentary - Trade Now) is down 42% year to date and JDS Uniphase (JDSU - commentary - Trade Now) is down 25%, year to date.

Both Akamai and Juniper are trading back to May 2009 levels -- almost near the March 2009 market bottom levels. It's difficult to understand such a brutal correction.

High-flying Netflix (NFLX - commentary - Trade Now) has only fallen back to May 2011 levels.Apple (AAPL - commentary - Trade Now) is back to July 18, 2011 levels. Amazon (AMZN -commentary - Trade Now) is back to late June 2011 levels.

Choose your momentum stocks wisely.

What do Akamai, Juniper, and JDSU have in common? All were part of the momentum trade in tech stocks and each was built on a simply story: Next-generation networks built out more than a decade ago in the dot-com bubble were finally at capacity and current bandwidth application data hogs such as video streams were forcing carriers to upgrade to more gear and networks to keep up.

As the signs became clear that the economy was at risk for heading into a double-dip recession (or worse), these stocks got killed. In a shrinking economy, these stocks all sell gear that is a nice to have but is not must-have.

The damage done to these stocks won't soon heal. It will take months of them settling out and some signs that the economy is on the mend before you'll want to get back in to them.

In future, these kinds of stocks might be as valuable as the 10-year in predicting when the economy is slumping.

From RealMoney

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