Stock Market Commentary for Wednesday, May 11, 2005

Despite the chatter about hedge funds being in trouble and high oil prices, the market trading on Tuesday was still strictly technical in nature, and not related to true economic and business fundamentals. The moderately sharp Nasdaq decline of 16.90 points was certainly disheartening, but on such light trading volume was no more significant that the moderate gain (on light volume) we saw on Monday.

It turns out that all of the chatter about hedge funds was primarily the result of a story in the Wall Street Journal. Traders and speculators love to trade off bad news (or speculation or so-called "analysis") published by "The Journal", but a lot of this stuff has a very short shelf life. Yes, hedge funds are bad news, but that's not new news. Hedge funds thrived on commodities speculation and low interest rates, but higher interest rates remove that unnatural investment and trading incentive. The bad news for hedge funds is good news for traditional investments.

Traders and speculators may have started to bet on the downside as Nasdaq was approximately at the top of a downwards-sloping "channel". These guys may continue to attempt to force Nasdaq downwards in that trading channel, but their success or failure depends on real money flows for stock mutual funds (which crept up last week).

The economy continues to poke along, neither booming nor busting. I would note that over the past two weeks we have seen increases in chain store sales as gasoline prices have declined.

Nasdaq trading volume was very light (1.60 billion shares), and breadth was almost strongly negative, with 1.97 losers for each gainer. It would be a mistake to treat a decline on such light volume as a true sell-off.

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-- Jack Krupansky