NASDAQ poised to bounce back from oversold position
Yesterday NASDAQ went... nowhere, but by the most indirect route possible, heading both down sharply and up sharply before closing essentially flat for the day. Although there was no significant net bullish interest, the significant thing is that the bearish enthusiasm clearly evaporated, indicating that the market may be "oversold", that it has reached "selling exhaustion", where everybody that might sell has already done so. That doesn't mean that it is ready to rebound a lot higher, but does mean that bulls at least have a hint of some breathing room.
NASDAQ remains hovering at the bottom of its trading range – technically it is a couple of points below the March peak, but that's close enough to be statistical error (less than 0.1%.) We could drift along in this hovering posture in a very narrow trading range for a bit longer, but traders don't like very narrow ranges, so if NASDAQ won't break cleanly below that March peak, the only other palatable option is to push higher, back towards the July peak of the trading range. This is not a certainty, just a tendency.
NASDAQ futures are up moderately, but the same question remains as to whether people will really pile on to the opening pop, or sell into any rally. We know what the futures prices are, but we don't know the intentions of people after the market opens.
We could see a bit of a short squeeze, which could accelerate in this slow summer trading, but it could easily peter out as well.
We're getting near the end of the bulk of the Q2 reporting season, so although we will see volatile action in individual stocks, overall activity could become more muted. We could see a drift down as enthusiasm for Q2 wanes, but we could also see some less-speculative money flow into the market now that the uncertainty of Q2 is evaporating. And any "buy the rumor, sell the news" effect is likely to have mostly run its course.
Geopolitical events are not a major factor here. Traders and short-term speculators just use bad (or good) news as a cover for their underlying bias.
We have two major factors here now, the ongoing, incremental improvement of the economy on the plus side, but anxiety over whether the Fed might withdraw "accommodation" at too fast a pace on the downside. My view is that Yellen is more of a dovish pragmatist, so she will go easy on withdrawing Fed stimulus until GDP picks up more solidly and the unemployment rate drifts down closer towards 5.5%. The stock market probably has a good solid year, if not two, to go before interest rates begin to have even a remotely negative impact on the real economy. It's mostly about perceptions.
-- Jack Krupansky