Seems like only last month that the NASDAQ Composite Index was inching towards 4,600 with expectations of it cruising through the 5,000 level. Oops, it was only last month that happened (September 2^nd, to be precise).

However, much of that optimism has been laid asunder over the past couple of weeks, with the NASDAQ Composite Index down almost 5% over the past five trading days. The good news is it is still in positive territory for the year, up 3.2% in 2014. That’s not bad, but a far cry from the 10.6% year-to-date gain it boasted only five weeks ago.

Likewise, the S&P 500 Index is also now up a little over 3% so far this year, also giving back much of its gain over the past four weeks.  That’s not surprising since this capitalization-weighted index is dominated by many of the same tech stocks that influence the NASDAQ, such as Apple and Microsoft.

At the same time, the less tech-oriented Dow Jones Industrial Average is now in slightly negative territory for the year, falling in sympathy with the rest of the market while never getting as far up to begin with. All in all, what started out as a pretty strong year has quickly devolved into a bit of a mine field.

But that’s exactly what we have been calling for all along, and quite frankly is good news for those of us who never got sucked up into the euphoria of grossly overpriced momentum stocks to begin with. It also provides an opportunity for us to get back into some stocks we really like, but had gotten out of recently because they had become overpriced.

Back in August we closed out positions in Western Digital (NSDQ: WDC) and Seagate Technology (NSDQ: STX) at prices of $100 and $60 respectively. Now priced at $89 and $54, they are very close to being added back to our portfolio.  We are not short-term traders by nature, but we have to play the cards we are dealt.

So don’t be surprised if you see more positions closed out if the market continues to deteriorate. We recently tightened up the ‘Stop Loss’ prices for many of our portfolio holdings to lock in a profit should the market push them lower. However, we will be ready to buy them back when the price is right.

Speaking of which, Rob DeFrancesco has a list of five tech stocks that he is following closely and would love to buy at lower prices. He outlines them in his article below, and will keep you apprised in the weeks to come as this topsy-turvy market creates buying opportunities that might not otherwise appear.

A stock market crash is very bad for just about everyone, a correction is difficult for most companies, but a two-tiered market (like this one) is where shrewd investors (like us) are able to recognize value and acquire quality companies at a fair price.

NASDAQ Composite Index:                                                                     

Friday, October 10 = 4,276.24                                             

Year to Date = + 3.2%                                       

Trailing 7 Days = – 4.8%                                    

Trailing 4 Weeks = – 7.3%

Next Wave Portfolio Update: Assessing the Recent Pullback

By Rob DeFrancesco

With the Nasdaq Composite down 7.3% from its September high, tech investors over the past few weeks naturally have turned much more cautious, especially as we head into third quarter earnings season. Many individual stocks have fallen a lot more than the index, with some networking names hit particularly hard because of negative earnings pre-announcements in the segment.

On a technical basis, the index has broken down below its 200-day moving average, which is usually not a positive sign for the short term. Also not encouraging: big one-day rallies without any follow-on buying.

Unless the market is able to quickly firm up (something that does not appear likely at this point because of the uptick in volatility), I see short-term downside risk for the index to the 4,150 to 4,200 range, vs. 4,272 right now.

The good news is valuations have come in ahead of the release of Q3 results. With stocks off their best levels of late, investors may respond favorably to strong individual earnings reports because they see value at these lower prices. However, there is concern that companies will offer cautious Q4 guidance for a variety of reasons, including a pause in spending by U.S. service providers, continued stagnation across Europe and slowing growth in China.

For now, the most risk-averse thing to do is hold off on putting new money to work in the emerging tech sector until a clearer picture emerges over the coming weeks of how this pullback plays out.

A telling metric: how earnings reports are received. If even good news out of Q3 were to be sold off, that would be a clear indication of a real change in investor sentiment; sellers would then begin to assert more control, leading to a broader pullback for the overall market. A more positive general reaction would set the tone for a rally into the end of the year.

As the market wrestles with where to find equilibrium between the bulls and the bears, I am keeping a close eye on a group of profitable companies with strong top-line growth rates that would be even more attractive at lower valuations.

Here are five names on my watch list (ranked by market cap):

*Splunk (SPLK, $53.22)—enterprise analytics software

% pullback from 52-week high: -50%

Market cap: $6.4 billion

Estimated fiscal 2015 (Jan.) revenue: $428 million

Estimated FY’15 revenue growth: +41%

Estimated FY’15 EPS: $0.02

Comments: A big-data analytics play, Splunk is focused on monitoring the flow of information from machines. Splunk is quickly gaining traction in the enterprise and customers are putting its solutions to work in new uses cases, including security. In fiscal Q2, the company added 500 new customers (acceleration from 400 adds in the previous quarter), taking the installed base of accounts up to more than 7,900, an increase of 32% from the year-ago level.

*Arista Networks (ANET, $78.13)—high-speed datacenter switches

% pullback from 52-week high: -17%

Market cap: $5.0 billion

Estimated 2014 revenue: $564 million

Estimated 2014 revenue growth: +56%

Estimated 2014 EPS: $1.22

Comments: Competes mainly against Cisco Systems (CSCO) in high-speed datacenter switches, a market expected to reach $7.7 billion this year on its way to $12 billion by 2017. Arista only has a 7% share of this segment, so has plenty of runway for growth. Arista’s software-focused approach makes its solutions more open and flexible. The company has more than 2,700 customers; Microsoft (MSFT) is the only 10%+ customer.

*Fortinet (FTNT, $23.58)—enterprise security

% pullback from 52-week high: -12%

Market cap: $3.9 billion

Estimated 2014 revenue: $740 million

Estimated 2014 revenue growth: +20%

Estimated 2014 EPS: $0.48

Comments: Revenue in Q2 rose 25% and billings were up 33% (acceleration from 26% growth in Q1). The real standout in Q2 was a 73% jump in U.S. enterprise revenue, driven by the firewall refresh cycle and network upgrades. The company’s solid performance was helped out by accelerated demand for high-end enterprise security appliances, channel investments leading to increased RFP activity and improved sales force productivity.

*Ultimate Software (ULTI, $127.95)—cloud-based HR/human capital management software

% pullback from 52-week high: -25%

Market cap: $3.6 billion

Estimated 2014 revenue: $506 million

Estimated 2014 revenue growth: +23%

Estimated 2014 EPS: $2.01

Comments: One of the real veterans of cloud software, Ultimate delivers consistently good results. The company in 2002 switched over to the software-as-a-service (SaaS) model, and since then has produced a recurring revenue compound annual growth rate (CAGR) of 29%. Ultimate has more than 2,700 customers and 17 million people records in the cloud; it mainly targets enterprise accounts (companies with 1,500+ employees) and the midmarket (companies with 500 to 1,500 employees).

*Veeva Systems (VEEV, $25.35)—cloud-based CRM software

% pullback from 52-week high: -48%

Market cap: $3.3 billion

Estimated fiscal 2015 (Jan.) revenue: $303 million

Estimated FY’15 revenue growth: +44%

Estimated FY’15 EPS: $0.31

Comments: Cofounded by CEO Peter Gassner—who has a lot of experience in enterprise software (Salesforce.com, PeopleSoft and IBM)—Veeva provides customer relationship management (CRM), content management and master data management solutions geared specifically toward the life sciences industry. The company has about 200 customers, including 33 of the 50 largest global pharmaceutical companies. Veeva’s core CRM solution has a 33% penetration rate into the world’s roughly 450,000 pharmaceutical sales reps.