Trackers Say Nasdaq’s Pattern This Year A Fluke
By Jed Graham
Investor's Business Daily
Some traders smart enough, or lucky enough, to have sidestepped most of the yearlong tech wreck often suggested stocks could sink just as much as they rose.
Hmmm. They likely never realized just how prophetic they’d turn out to be. So far this year, the Nasdaq’s chart pattern looks almost exactly like the inverse of its path through the first half of 2000.
By this time last year we’d seen the inflating of the technology bubble, followed by a bursting and partial recovery. This year, techs were beaten down to depths few would have imagined. That sparked a big April rally, which has given way to a new bout of selling.
Is this pattern significant? Probably not, say the market professionals contacted for this story, all of whom look at the stock market from a technical perspective. Even if the pattern has held so far, they say, there’s no reason to expect it will continue.
On the other hand, though, not everyone will dismiss the possibility that the Nasdaq’s course this year will run opposite to its volatile movement in 2000.
“It’s not uncommon to see turning points on the same day they occurred a year ago,” said Stanley Harley, editor of the Harley Market Letter. “That does happen. But one has to be careful. You may get patterns for awhile that then fade and disappear.”
Harley is among the niche – some might say “fringe” – of technicians who believe the stock market does follow predictive cycles.
But he doesn’t think the current Nasdaq cycle is simply reversing what happened last year.
Some Pros Do See Cycles
Instead, Harley views the stock market as having cycles that last 99 trading days. He says we’re in an up cycle that began in late March. “The cycle normally has a midcycle pause,” he said, which in this case accounts for the Nasdaq’s sudden loss of momentum in the past week. But he expects tech stocks to resume a rally into late July, when the 99-day cycle ends.
If he’s right, there goes the counter-2000-movement pattern. The Nasdaq rallied through much of June and half of July last year.
But so far in 2001, the Nasdaq’s ups and downs have mirrored those of 2000:
January: Last year, the Nasdaq traded down as investors took profits on some eye-popping gains. This year, it rebounded from a brutal downtrend.
February: Last year, it was nothing but blue skies and a huge rally. This year, the steep downtrend resumed as investors took cover and recession fears mounted.
March: Last year, more gains and a major peak. The Nasdaq 100, mainly made up of big techs, topped on March 27. This year, March saw major selling, hitting a bottom on April 4.
April: Last year, a big reversal spurred panic selling. This year: “panic” buying. The Nasdaq zoomed 30% in a mere two weeks.
May: Last year, the Nasdaq broke down further and bottomed on May 24, setting up an eight-week rally. This year, it continued to recover through May 22 before selling off.
Should the scenario continue to play out this year – to be sure, no one contacted for this article predicted that will happen – the Nasdaq will be weak through mid-July, though it won’t approach the April 4 low. Then it will rise through early August and slip back down until Labor Day, when a massive rally will start.
Jim Tillman, author of the Cycletrend stock market timing newsletter, doesn’t see the Nasdaq as charting out an opposite-2000 pattern this year. But he isn’t ruling out the possibility. In his view, the midpoint of this reversing cycle could have been in November 2000, when the Nasdaq crashed through 3000.
“Quite often, from the center of its largest decline, your cycle unfolds the way you went in,” Tillman said. He likens the motion to a pendulum swinging. Under this scenario, the Nasdaq would plunge through its April lows and hit bottom in late July before starting a huge rally.
Appearances Vs. Reality
Stock-market patterns often appear to repeat, says Todd Salamone, director of research at Cincinnati-based Schaeffer’s Investment Research Inc., which specializes in analyzing market sentiment and other technical indicators. But then they fade, he says.
The January rally looked exactly like the April rally for a few weeks, but then the similarities ended, he notes.
“I believe in looking at (the similarities) and being aware of them, but events are independent of one another,” Salamone said. “You shouldn’t get locked into thinking from a trading standpoint: ‘It happened then, it has to happen again.’ ”
The Nasdaq’s reversal of last year’s chart pattern has less to do with stock market cycles than it does with Federal Reserve policy, says Robert Robbins, chief investment strategist at Robinson-Humphrey Co.
“Leading into Y2K, the money supply was growing too fast,” Robbins said. “The Fed tried to sop all that up” by hiking interest rates, and the money supply began to shrink just as fast as it had been growing. |
