Here's a bullish argument for the NAZ:
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Groupthink Apr 21 2000 5:04PM CST Archives...
The Argument for a Nasdaq Recovery
by Charles Rotblut, CFA
Senior Analyst/Contributing Editor
Last week's plummet in the Nasdaq {NASD} was just the bait that many bearish market analysts were waiting for to claim their vindication. While they may have contributed to the intensity of the panic selling, last week's selloff was more of a buying opportunity than a validation of the bears' call for a continued pullback. This reasoning is based on multiple fundamental and technical factors.
The primary target of many of the bearish, value-oriented market analysts is the high multiples that technology stocks carry. Although the majority, but not all, of the technology stocks with sustained growth rates are trading a premium valuations, they are playing a part in a communications revolution that is quickly building very real barriers to entry. This has resulted in a targeted shift of investment dollars, and the resulting valuation premiums directly reflect the underlying blocks of economic theory: supply and demand. Quite simply, there is more money chasing technology stocks than there has ever been in the history of the American public markets.
The reasoning behind this skewing of supply and demand rests on an intertwined economic expansion and telecommunications revolution. The United States is currently experiencing the longest economic expansion in its history. This expansion is being driven by low inflation, a comparatively stable domestic and international climate (e.g. no major wars), an improving international economic climate - particularly in developed countries, and a fundamental shift in the ways corporations operate. Today corporations operate with leaner staffs, have better inventory management, outsource more, increasingly compete on an international scale, and rely more heavily on information technology than they did in the past.
The expanding reliance of corporations on information technology is a key point because it is helping to fuel the worldwide construction of a new telecommunications infrastructure. The economic benefits of this infrastructure are extreme because the building of this new communications foundation will continue to spur a new line of products, enable corporations and individuals to act with an unprecedented level of information available at their fingertips, and create an entirely new forum for conducting business (as is now occurring on the Internet). The amount of capital that is being used to build as well as to manufacture and purchase products to take advantage of this infrastructure has risen exponentially over the past several years and will likely continue to do so over the next few years. The resulting profits are, in turn, creating a new group of millionaires who are actively spending and investing their money, thus helping to continue to spur on the overall economy.
The technical corroboration for a recovery in the Nasdaq begins with the Wilder RSI oscillator, which fell below 30 last Wednesday (scores below 30 indicate that a stock, or, in this case, an index, is oversold) - as is shown on in the chart below. This was the first buy signal issued by the Wilder RSI on the Nasdaq since October of 1998. The Overbought-Oversold Index also showed a buy signal on the Nasdaq for the first time since October of 1998. Even more notable is that the Overbought-Oversold Index dropped to -1280 on Friday versus -1240 in October 1998, in other words, the extent to which the tech-heavy index was oversold was greater last week then it was in October of 1998.
Two-year chart of the Nasdaq with 14-2 Wilder RSI
tscn.com;
The Wilder RSI called a buy signal on the Nasdaq in October of 1998 at 1413, and the index then proceded to rally to 2000 before a sell signal was issued. The Nasdaq charted a gain of over 40 percent on this run. Last Friday, the Wilder RSI issued a buy signal at 3310. Presuming that history repeats itself and the Nasdaq again rallies 40 percent, the index should rise to over 4600. Coincidentally, such a rise, if it were to occur, would place the Nasdaq in an area of former short-term support.
Based upon what occurred in October of 1998, market commentators that suggest that the Nasdaq will experience another, more severe, pullback akin to what happened in August and early September of 1998 when the Nasdaq lost 25 percent of its value before rallying back 16 percent - only to then lose an additional 10 percent of its value in October. What these commentators are not stating in the investment media, however, is that the recent turbulence resulted in an initial decline of 19 percent, followed by a rally of 9 percent, and another decline of 25 percent, in a period of approximately six weeks. In other words, a similar pattern has already occurred.
This is not to say that history will repeat itself; economic conditions are materially different now from the way they were in October of 1998. During the fall of 1998, the Asian economic crisis was reaching its peak, with several large drops occurring on the Far East exchanges. Fed Chairman Alan Greenspan was then openly concerned about the possibility of an international economic slowdown that would end the economic expansion in the U.S. Furthermore, interest rates were being lowered, fuel prices were declining, the semiconductor industry was in a slump, and investors had an insatiable appetite for business-to-consumer (B2C) Internet stocks. In April 2000, international economies are improving and Greenspan is openly concerned about an "overheated economy" and "irrational exuberance". Furthermore, further interest rate hikes are expected, fuel prices are coming off of recent highs, the semiconductor industry showing record strength, the weaker B2C stocks are at record lows, and both the Nasdaq and the Dow are making unprecedented point swings.
It's difficult to predict the direction of the markets at any given time; to dismiss the lurking penumbra of underlying bearish sentiment would be naive. However, the economy remains strong and the aforementioned technical indicators point to a continuation of Monday's and Tuesday's surge.
Finally, two sources of market timing theory point to further gains in the Nasdaq. The Stock Traders Almanac points out that the equity markets tend to perform well in presidential election years. This almanac cites that the trading day before Good Friday has been up five times and down fractionally twice in the 1990's, and that May tends to fare well in years when the incumbent president is not running for re-election. Demographic trend market theorist Harry Dent believes that, given the current age of the U.S. population and the population trends that have occurred over the past 40 years, the economy should continue to expand until mid-2009.
Disclaimer: This report is published solely for informational purposes and is not to be construed as advice or a recommendation to buy or sell a security. Trading involves risk, including possible loss of principal and other losses. Your trading results may vary. No representations are being made that utilizing techniques mentioned in this article will result in or guarantee profits in trading. Past performance is no indication of future results.
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