Saturday, October 11, 2014

NASDAQ breaks below its broader trading range as hedge funds flex their muscles

NASDAQ had been "dangerously flirting" with the lower edge of its broader trading range for some time, so it was really only a coin flip probability of whether or when it might break below that lower edge. That "break" occurred on Friday. The bottom line is that there was no significant buying enthusiasm at the lower edge. Traders don't like inactivity, so in the absence of activity they will create some of their own and reverse their positions and bet on a move in the opposite direction.
 
Friday illustrated the power of hedge funds as well. They are not long term investors like the big mutual funds. They are speculative in nature. Sure, they will sometimes "invest" in the larger "name" stocks – but only to the extent that the momentum is in their favor, and as soon as momentum peters out... they bail out. And... they are not hesitant to place massive short position bets when they feel that there is blood in the water, such as happened over the past week and on Friday in particular when there was a complete lack of commitment to buying as NASDAQ probed the lower edge of its broader trading range.
 
So, what does this mean? Actually, not very much! It's hard to say how much money the hedge funds deployed last week on their downward short bets, nor do we know how much more money they might be willing to bet, nor do we know how patient they intend to be at holding those short positions. The problem with hedge funds and short positions is that the only way to exit them is to start buying the stocks, which puts upwards pressure on the price, which limits their gains. So, they have to be careful with the size of their short positions so that their own exit doesn't crush their own profits. And if another hedge fund starts exiting ahead of them, well, it's called... a short squeeze, which is not good for hedge funds with large short positions.
 
In short (ha, ha!), there is no telling whether the sell-off, still a "mini-correction", is hitting its limits or merely getting started for a true (10% or more) full-blown correction, but it is likely just opportunistic short-term trading and speculation as people wait for the Fed meeting and the end of the QE buying program to be behind us at the end of the month.
 
Besides, the fundamental driver for U.S. stocks is the health and outlook of the U.S. economy, and the U.S. economy continues to incrementally improve (more people working as every day, week, month, and quarter tick by) – which is the primary impetus for the end of the QE buying program in the first place.
 
Now, I need to work on my short list of preferred momentum stocks to pick up if there is any further dip of NASDAQ. Maybe a couple of chip stocks, like maybe some more Cypress Semiconductor (CY) or NVIDIA (NVDA) or Qualcomm (QCOM) or Applied Materials. I'm also considering some more Banco Santander (SAN) or TD Bank (TD).
 
-- Jack Krupansky

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