Comments from a newsletter this weekend
NASDAQ COMMENTARY
The week finished off with a bang on Friday, as the Institute of Supply Management (ISM) Index (formerly National Association of Purchasing Managers Index) showed a jump to 54.7% in February. This marks its first reading over 50% in 19 months, signaling expansion in the manufacturing sector. This sign of economic improvement allowed the Nasdaq Composite to finish the week on a big positive note, gaining 71 points Friday and closing at 1802.75, up 4.5% for the week.
Does this news suggest the worst is over for stocks? The next week should be very telling as to whether this move is a breakout or a fakeout. There are a number of concerns for the Nasdaq in particular. First, the Nasdaq Composite has dramatically underperformed the Dow and the S&P indexes in recent weeks, which is typically a bearish situation for the major stock averages going forward. In addition, sentiment is generally too complacent, especially when measured by the CBOE Volatility Index (VIX - 22.13). This measure of volatility hit a 7-month low intraday on Friday, which suggests investors are not expecting major downside risk for the markets. Yet that's usually when you should be concerned, as markets have often topped when the VIX hits the low-20's while typically bottoming when the VIX surges to the 35-40 range in this bear market.
The one plus for the Nasdaq is the possibility of a head & shoulders bottom in the Nasdaq Composite. As you see in the chart, the 1700-1750 zone has again held as support the last two weeks, setting up a potential right shoulder that equates to the April 2001 lows. The head is the ultimate low down under 1500. A weekly close under 1700 would invalidate this technical formation, while a breakout over 2100 will ultimately be needed to signal a confirmed uptrend. But in the meantime the head & shoulders setup says the market could be forming a bottom.
The OEX and Nasdaq rallies must earn some degree of respect technically, especially with the longer-term bottoming formations on the charts. However, sentiment data is showing too much optimism for this move to have impressive upside potential. Despite the Dow's rally to the highest level of the year, the Nasdaq and S&P indexes have more work to do to get out of this trading range environment. So don't get too caught up in the news headlines about a growing economy again. We expect it will remain a bumpy market environment until we see if there is confirmation of improvement in the first-quarter earnings reports in mid-April. |
