The Big Picture
Tuesday, July 30, 2002
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Nasdaq, S&P 600 Follow Through; Volume Is Mixed
BY CHRIS GESSEL
INVESTOR'S BUSINESS DAILY
The stock market met the definition of a follow-through Monday. But not the spirit.
Sure, the percentage gains were impressive. Just about every major index - the Nasdaq, S&P 500, small-cap S&P 600 and Dow industrials - delivered a gain in the 5% area.
Breadth was excellent. Advances destroyed declines by more than 4-to-1 on the NYSE. The Nasdaq came in a little shy of 3-to-1.
Top-rated stocks, the Achilles' heel of so many false rallies, took part in the festivities along with loads of beaten-down names. In past weeks, seemingly strong rallies would neglect to include more than one or two stocks with strong earnings and share performance. Those upturns would barely last through the day, much less turn into a meaningful advance.
The market even showed the ability to shrug off bad news. Qwest Communications (Q) over the weekend rescinded its financial forecasts. The No. 4 local phone firm also will restate 1999 and 2001 results after misreporting sales of $1.16 billion. The news at first hammered Qwest's stock, which dropped as much as 26% before recovering for a loss of just 0.01.
Imagine the effect on the market if Qwest made its admission in prior weeks, when stocks were getting slaughtered on news good and bad. Monday's market showed a major change in character and completely ignored Qwest. The major averages gapped up in the morning and rallied the rest of the day.
But volume offered a mixed bag. Less charitable folks might call it a troubling divergence.
Nasdaq trading picked up 14%. That means on the fourth day of its attempted rally, the Nasdaq composite rallied well more than 2% on heavier volume than the prior session. That meets the criteria for a follow-through day, which can signal a major advance.
But at 1.93 billion shares, trading just exceeded the Nasdaq's 50-day moving average. On a day when the Nasdaq surged 5.8%, its best outing in almost 12 weeks, volume was just OK? (Most successful follow-throughs have occurred on solidly above-average volume.) The trading seemed especially light, as in the past five weeks trading topped 2 billion 16 times.
NYSE trading actually slipped 1 million shares to 1.804 billion. That follows a big volume drop on Friday. So even though the S&P 500 and Dow marched up 5.4%, the action eased slightly. That's a remarkable lack of conviction when the headline numbers seemed so good. Institutional investors simply weren't buying the rally, at least on the NYSE. The upshot? No follow-throughs for those indexes.
The S&P 600 gained 5.6% on a sizable jump in volume, a solid follow-through. Studies of its past behavior show it to be a somewhat more reliable indicator of the market's future direction. It's not nearly as volatile as the Nasdaq, which cuts down on its false positives.
All you need is one of the major indexes to follow through to confirm a shift in the market's overall direction. Growth investors should turn their attention to fundamentally strong stocks and see which of them are building good bases. A few have already popped to new highs, although their price patterns are fairly erratic. It may take weeks for leaders to emerge.
Recall the dearth of good breakouts last fall? That turned out to be an excellent leading indicator of the market's path this year.
It may pain you to stay near the sidelines as the indexes and battered stocks bounce off the bottom. But major bull markets require healthy leadership. Without that, you risk getting caught in a bear-market rally.
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