The NASDAQ market sentiment had already begun to turn negative in the early part of this week as Mr. Alan Greenspan, Chairman of the Federal Reserve Board, made a remark in his semi-annual economic report to the Congress that U.S. economic growth had slowed substantially and "downside risks predominate" in the coming months. There are, however, some hopeful signs that the economy will emerge quickly from the slowdown, said Mr. Greenspan.

Some of Wall Street's traders interpreted Mr. Greenspan's remarks as a signal that the Fed might not cut interest rates any further until their next meeting at the end of March. Immediately after Mr. Greenspan completed his report, traders began rotating funds out of the tech-heavy NASDAQ to defensive and financial sectors.

Shares of Applied Material [NASDAQ:AMAT], the chip equipment giant, bucked the trend and moved up as much as 20 percent higher than the previous day's after-hours closing price, despite the company's gloomy forecast and earnings cut from Prudential Securities and Lehman Brothers.

Traders apparently didn't pay attention to Applied's investor sentiment, which hit a 26-week low on Jan. 5. From our model, investors have already priced-in Applied's bad news at around $42. In a reverse negative sentiment, we believe that investors may buy-on-the-news and sell-on-the-rumor. An improvement in market sentiment, powered by an upbeat outlook from the fiber-optic equipment maker Ciena [NASDAQ:CIEN], which beat Wall Street's general consensus estimate by 3 cents and forecasts their fiscal revenue this year to be between 10 and 15 percent above a consensus expectation of $1.53 billion, was only a short lift.

We believe that earnings reports and gloomy outlooks from Hewlett-Packard [NYSE:HWP] and Dell [NASDAQ:DELL] have already priced-in NASDAQ sentiment since both companies warned the market months ago. The late-Thursday warning from Nortel Networks [NYSE:NT], which will report a loss in the first quarter and slash 10,000 jobs in 2001, is believed to be the catalyst for the shake-up of investor sentiment in the tech-heavy NASDAQ market. Our data suggests that the NASDAQ will remain highly volatile as the macro economic future and the Fed rate cut remain uncertain.

In an interview on CNBC, the financial news network of NBC, Mr. Steve Milunovich at Merrill Lynch began to advise his clients to "stay away from the big name tech stocks with market capitalization over $30B for the next several years". In our view however, big-cap tech companies such as Intel [NASDAQ:INTC], Applied Materials, EMC [NYSE:EMC], Cisco [NASDAQ:CSCO], Sun Microsystems [NASDAQ:SUNW] and Oracle [NASDAQ:ORCL], with concentrated core competencies and strong distribution channels, will maintain their leadership positions during the transition from PCs to the network computing era as the companies continue to increase their R&D spending and cut costs. 

We believe that the growth margin for small-cap tech companies could begin to deteriorate as they will be forced to increase their R&D budget in order to compete with big-cap tech companies.

Based upon our argument, we believe that the competitive environment of the tech sector will significantly increase. We anticipate that more partnerships between small- and big-cap tech companies will be formed while an outright merger could be possible. Although big-cap tech stocks may not double or triple in value every year as observed in certain small-cap tech stocks, we believe that these big-cap tech stocks with predictable earnings will provide long-term investors with returns that still outperform the S&P 500 during the next bull market.