What Blue Chips?

By Daniel Kadlec

If you found a tract of land for sale and were dead certain it would be worth 10 times the price to a developer, you'd sell or hock everything you own to buy it. Right? Well, that's the way investors around the globe are behaving with NASDAQ stocks. A massive liquidation of nontech assets is under way as people reach for the means to buy more Cisco, 3com and Apple. It's an incredible display of pack investing that begs the question, Is NASDAQ bulletproof?

Just saying yes has been a smart play. Up an unprecedented 86% last year, the index known for its high-tech and biotech wonders is up an additional 21% this year. It hit a new high Friday as the Dow struggled to stanch a 16% decline. The two market gauges have diverged dramatically all year, going in opposite directions on half of all trading days. Such an extreme divide has occurred only seven previous times in 30 years, according to Bianco Research, and in this case illustrates the extent to which investors are dumping old-economy stalwarts in favor of new-economy stars.

The reallocation is not just in assets but also in talent. Bankers, lawyers and money managers are fleeing careers in depressed pockets of the market like real estate to hitch a ride to Silicon Valley.

The shift is clearest, though, in hard numbers. In January, investors poured a record $40 billion into stock funds, and $29 billion of it went into aggressive-growth and growth funds--the ones that own NASDAQ stocks. The rest went into sector funds, which are 75% invested in tech. Equity-income funds and growth and income funds (which favor blue chips) had outflows. Bond funds also had outflows--a hefty $10 billion worth.

By one measure, the NASDAQ accounts for every penny made in the stock market the past 12 months. In that span, the market value of all U.S. stocks increased $2.5 trillion, but NASDAQ stocks alone rose $3.1 trillion. That means non-NASDAQ stocks fell $600 billion. Foreigners are equally gaga. Last year they were net sellers of Treasury bonds for the first time, and they bought a record $107 billion of U.S. stocks. Care to guess which ones?

I believe in technology. I believe in the Internet. It's insane not to have some of your money invested there. But no stock group is truly bulletproof. Since late '98, rising interest rates have toppled one after another--utilities, then banks, then industrials. Now some established tech leaders like Microsoft and Lucent are under pressure. Next and last on the ladder of interest-rate vulnerability are the new-economy darlings. Can they stand firm? Given the money flowing their way, maybe.

But a herd instinct is at work here, and eventually the herd goes wrong. When you invest this way, the bet you make is that you can run fastest when the jig is up. That's a tall order. Typically, the end of any trend is clear only in hindsight. Until then, every dip looks like a buying opportunity.

So stay diversified. If you invest in mutual funds, keep something in overseas funds and small-cap and large-cap value funds along with your aggressive-growth holdings. If individual stocks are your thing, five is a minimum, and be certain they are in different industries. Look for value. Depressed bank stocks are bound to rally after the Fed signals that rates have risen enough. When will that be? Probably when the NASDAQ finally cools.

See time.com/personal for more on NASDAQ stocks. E-mail Dan at [email protected] See him on CNNfn Tuesdays at 12:45 p.m. E.T.