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RealTime IT News

Rocket Man: ISDEX Gains 55% In First Week Of Year

Don't tell Warren Buffett, but the across the index, buying of ISDEX component stocks pushed up this leading indicator of where Wall Street meets the Web some 55% since December 31.

Volume for these 50 stocks that represent the girth of the Internet experience from content to commerce has also soared. Our abacus registers about 220 million shares zipping in the etherspace January 8. Compare that to ISDEX average daily volume in 1998 which was 70 million shares, so we're already nearly 3 times that amount and the new year is just getting its feet wet, or experiencing liquidity at least at levels not seen in the Internet stock arena to date.

Here's a handy table that shows ISDEX closing highs since its inception in April 1996. Safe to say that nothing in 1996, 1997 or even 1998 can touch the moonshots for 1999, with date and ISDEX close:

date close
1/11/99 413.19
1/8/99 359.93
1/7/99 335.91
1/6/99 306.17
1/5/99 276.14
1/4/99 276.08
So what's driving Internet stocks to dramatic new levels?

1) 1998 ISDEX closed the year up 187%, handily beating the Dow, NASDAQ and S&P 500 and thus marking the first year that Internet stocks in general beat the market. Consider in 1997 ISDEX ended the year about where it began, only a few superstar stocks soared, the rest were ignored by Wall Street.

In 1996 Internet stocks were not even on anyone's radar but us and a few geeks with stock options wondering if they'd ever be worth a hoot.

2) individual investors who missed 1998's big run may be "getting in the game."

3) institutional money managers can no longer afford not to have some Internet stocks in their portfolio.

Let's dwell on the latter point because it could dramatically change the valuation playing field here. At share volume north of 200 million we're beginning to see block trades being done in the ISDEX group.

While retail investors account for a huge volume on their own -- we'd guess 65% -- the arrival of institutional money, the deep pocketed professional money managers who run the pension funds, insurance funds, puts Internet stocks in a position that centers on basic economics: scarcity, supply and demand.

Many Internet companies have thin floats, few shares actually tradable. Retail investors have experienced the effects of this with wild mood swings in the sector. Imagine what is happening now in small degree and more increasingly if institutional money starts buying blocks of Internet shares.

In an already heated market the big buyers could further inflate prices as they snap up shares. Retail investors, meanwhile, could see more and more Internet stocks get out of reach as valuations rise, leaving them an opening only when a high-flyer with a real story splits.

Adding to the increased demand could also be the "January effect," each new year new money flows into mutual funds. In the past this has been invested in "blue chip" stocks.

But PC, auto, food, retail, and these sorts of stocks just aren't growing as quickly as the Internet industry. That could lead to fresh flow of new mutual fund money and institutional buying of Internet stocks. While we think some of these stocks are grossly overvalued, we also believe that the new demand coming into the group could create wider volatility than seen in the past. January and February should tell.