Monday, August 03, 2009

What does it mean that NASDAQ finally closed above 2,000?

Whoops! How did that happen? We weren't looking and suddenly NASDAQ bursts above the magical psychological level of 2,000, closing at 2,009, the first close above 2,000 since October 1, 2008. What does it mean? Not a whole lot.

There is absolutely nothing fundamental about NASDAQ closing above 2,000 as opposed to 1,975 or 2,025. Nothing. Zilch. Zip.

Nothing fundamental. Rather it is all psychological, a mythology or story in the heads of short-term traders, as well as the media. Traders do like to make up stories to pitch to each other and to build "trades" around those stories. Psychological thresholds are just as good as fundamentals when it comes to the short-term behavior of traders, and the media.

Left to their own devices and desires, traders love range trading. Up, down, up, down... Traders love anything that moves. Movement means transactions, transactions mean fees, fees mean big paychecks and big bonuses. Traders would be happy if the market continued moving up strongly, but if buying volume peters out, traders will reverse on a dime and bet on a reversal and a decline back towards the lower end of the trading range. And then start all over again.

The fundamental bottom line is that the stock market tends to rise as the economic outlook improves and that no level is fundamentally different than a penny above or below that level.

That said, the media and a lot of naive investors will in fact take the psychological "bait" and at least try to make a big deal about it. But, traders frequently do trade against the media and "retail" investors. So, the big question is whether euphoria on the part of retail investors can overwhelm the bearish cynicism of traders.

Personally, I am content to be a buy and hold investor. No trading. No short-term speculation.

-- Jack Krupansky

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