NASDAQ 4,000 - Take Four

Maybe today will be the day that NASDAQ can finally regain – and keep – the 4,000 level that it hasn't seen since December of 2000. Unfortunately, this is a slow, holiday trading week, so what happens this week will not necessarily stick for next week, especially since traders will be looking for preliminary Thanksgiving retail sales numbers to pass judgment on the strength of the economy (and hence the stock market) – at least from the mindset of a Wall Street trader. There should be some preliminary numbers on Sunday, if not "early indications" on Saturday.

 

It is not uncommon for Wall Street to take multiple attempts before crossing major numeric milestones. The problem is limit sell orders that speculators position both below and above the designated milestone. Some fraction of traders like to explicitly take profits short of the milestone or slightly above the milestone on the theory that the market is stretching too far and is weaker and likely to pullback anyway. We kind of saw that yesterday.

 

The other speculation theory is to place "stop buy" orders more than a little above the designated milestone on the theory that if and when the market reaches that far above the milestone then it is probably a good sign that the market is strong enough to be starting (or at least continuing) a "new leg" on the rally. It would appear that we haven't good there yet.

 

Traders seem to flip a coin as to whether they take a negative or positive bias on any given day. The bias isn't always reflected in futures. For example, even with futures up, traders can still take a "sell into any rally" bias, on the theory that real market strength isn't there yet. And if they're wrong, they can quickly reverse their positions and amplify any real strength. And vice versa.

 

The way the market has been trading lately, with new highs on thin trading with a lot of major stocks declining, as opposed to much broader advances, says that people are being rather tentative in placing major new bets. That's more than a little bit of a bearish sign, but can also be a signal of pent up demand that could just as easily explode to the upside as evaporate and "run for the exits" on the downside. It is indeed a volatile time. Nominally the upwards bias should be a year-end rally, but defensively people seem to be in more of a "sell into every rally" mood until the outlook gets stronger. The ultimate question is how many money managers are lined up with funds to invest before the end of the year.

 

Another factor is retail investors trying to dump mutual funds before the end of the year to try to avoid nasty capital gains tax distributions which can be greater than any actual gains they may have had from recent investments. If retail investors pull money out of funds, the funds may not have enough cash reserves and be forced to dump some of their holdings to satisfy withdrawal requests.

 

So, NASDAQ 4,000 today? Flip a coin. Besides, as I said, even if we close out this week above 4,000, we could easily lose it next week. Even if retail sales are strong or even "okay", people might feel that they are not as strong as expected or desired and then actually sell off on good news next week. And sometimes we see a "buy the rumor, sell the news" effect where stocks rally in advance on anticipation of good news and then these hot money speculators "take profits" as soon as the anticipation is over. OTOH, given the tentativeness of the market lately, we could see the opposite, positive reaction.

-- Jack Krupansky