Internet stocks are on fire. Furious buying over the past several trading sessions in many of the sector’s biggest names, including Amazon.com (AMZN), Expedia (EXPE), Google (GOOG) and Priceline.com (PCLN), have pushed the Dow Jones Internet Composite index to new 52-week highs. The Internet index now is approaching its 2007 highs, a clear signal that the bellwether tech sub-sector has long forgotten the depths of despair it sunk to in 2008.
The chart below of the First Trust Dow Jones Internet Index (FDN) shows just what a great year it’s been for Internet stocks. This exchange-traded fund (ETF) tracks the price and yield performance, before fees and expenses, of the Dow Jones Internet Composite index. The top five holdings in FDN as of February 28 were Google (GOOG) at 8.78%), Amazon (AMZN) at 6.06%, eBay (EBAY) at 5.86%, Yahoo! (YHOO) at 5.24% and Juniper Networks (JNPR) at 4.81%.
As you can see, FDN now trades well above both its short- and long-term moving averages. But despite the recent gains in the index, we still need to remember that however vibrant the gains in this volatile sector may be, they pale in comparison to the “irrational exuberance” days of last decade.
All we need do to see how far the Internet index has to go to get back to its former all-time glory is to take a look at the chart below.
As you can see, the all-time high for the Internet index was hit midway through 2000. Of course, the pain that followed after hitting that high was indeed severe, with the index marching downward nearly uninterrupted for over two years.
So, with all of the boom-to-bust history in the Internet index, how should investors approach the current 52-week highs? Well, when it comes to this volatile sector, you should always approach with extreme caution. That means if you are going to buy FDN or any of its component Internet bellwethers at current prices, make sure you do so with a tight stop loss firmly in place.