Today marks the halfway point of the calendar year, and so far it has played out pretty much as we expected. All eyes are on the S&P 500 Index in its bid to cross over the 2,000 level, while the tech-heavy Nasdaq Composite Index inches its way back toward its peak of just over 5,000 reached in March of 2000.

Was it really fourteen years ago that the so-called “dot-bomb” collapse began, leaving in its wake a trail of disillusioned investors? I vividly recall being on spring break with my wife and kids in April of that year, cutting short our vacation in Myrtle Beach to scramble back to the office as the Nasdaq quickly surrendered more than a third of its value less than two months after reaching its apex.

Although my clients did not have much exposure to the tech sector at that time, I was worried about the extent to which its collapse might carry over to the rest of the stock market. Turns out my concerns were misplaced and I could have spent two more days playing miniature golf and eating greasy food as the rest of the stock market shrugged off the demise of the tech sector as a “one-off” event.

Of course, with the benefit of hindsight we now know that it just took a little longer for the rest of the market to go through its revaluation phase, reaching its nadir in March of 2003 and again in March of 2009 before breaking out to the upside over the past five years in no doubt abetted by the Fed’s aggressive policy of Quantitative Easing that is now winding down.

For the first half of this year the Nasdaq Composite is up 5.6%, with all of that gain taking place since the third week of May. In other words, until six weeks ago the Nasdaq Composite had gone exactly nowhere for the year; what happened? First quarter earnings reports happened, dispelling the fear that the bad winter weather would translate into an overall weakening in demand for tech products. Most notably, Apple and Microsoft both shot up, pulling the capitalization-weighted S&P500 with them.

Since closing at a split-adjusted price of $74.96 on April 23^rd, Apple (NSDQ: AAPL) has appreciated almost 25% in only ten weeks! Microsoft’s (NSDQ: MSFT) gain has been less spectacular, gradually climbing almost 20% in value from its low of $34.98 reached on January 13^th. Throw Oracle (NYSE: ORCL) into the mix – up 13% in less than five months – and you have an unholy trinity of legacy tech stocks that nobody would touch with a ten foot pole a year ago.

Yet they are all now viewed as market leaders; why? Just as the dot-bomb meltdown revealed the inherent weakness in the financial models of so many companies that became expert at spending $1.50 to generate $1.00 in sales, the current market now demands much more from tech stocks than just a cool name and questionable revenue model.

Just ask the poor folks that bought Twitter (NYSE: TWTR) at $70 the day after Christmas, and then watched it drop 50% in value over the next five months. They probably feel about the same as 3D Systems (NYSE: DDD) shareholders who saw their stock peak at $96 in January only to see it freefall to less than $50 in April.  

For the past 45 days the stock market has not experienced a single day with more than a one percent move in either direction. It’s been 20 years since that last happened, and the gradually decreasing trading volume over the past three months suggests that investors are becoming cautious as the stock market treads lightly through uncharted waters.

We all know what nervous stock market investors want more than anything else; profitability and dividends. That does not bode well for momentum stocks with weak earnings and no dividends, most of which earn a very low score from our BiQ/STR method of evaluating tech stocks for growth potential. Unlike this time last year when many investors ignored fundamentals to drive the market up towards record heights, the second half of 2014 will proceed much more cautiously with an emphasis on quality.

NASDAQ Composite Index:                                                                           

Friday, June 27 = 4,321.40                                                       

Year to Date = + 6.2%

Trailing 7 Days = + 0.7%

Trailing 4 Weeks = + 1.8%

Portfolio Update

Three weeks ago we raised our buy limits for two stocks mentioned in our article, “How to Play the Looming Trade War with China”, bumping up Lenovo (OTC: LNVGY) to $25 and Ricoh (OTC: RICOY) to $65. On that day (June 10^th) Lenovo closed at $24.83, while Ricoh closed at $60.84.

While Ricoh has vacillated above and below $60, Lenovo has gone on a bit of a tear and is now trading above $27. That puts the stock 35% higher than where it was on February 25^th when it closed at $19.98. Its current price is less than a dollar below its all-time high of $27.86 reached in late January of this year, so as much as we love it we think it’s time to change our advice to ‘hold’ to give it time to break through that barrier.

The company announced this week that it will launch more than 60 smartphones in China and elsewhere this year, with half of those models supporting 4G technology. They also indicated that they intend to sell 80 million phones for all of 2014, making them a force to be reckoned with in the fast growing Asian market.

We still believe the stock has room to run on the upside for the reasons enumerated in our prior article, as thus far nobody seems to be latching on to the extent to which Lenovo should be able to leverage its emerging dominance in the PC hardware ecosystem.

Another company from our Equity Trades Portfolio recently breaching its buy limit is Symantec (NYSE: SYMC), which crossed back over $22 earlier this month after briefly rising above that price in May only to drop back under. This time we think it may run up closer to $25, as it has already broken through its short term resistance level of $22.50 on higher volume. For that reason Symantec is now also a ‘hold’ until further notice.