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:

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.