Sunday, February 22, 2015

NASDAQ 5000 is near

Most people have avoided talking about it out of fear that would jinx it, but the NASDAQ 5000 level is imminent. Like, only 46 points or less than a 1% rise. In truth, there is absolutely no fundamental significance of NASDAQ hitting 5000 - it's simply a psychological milestone or barrier. NASDAQ peaked just above 5000 in the old dot-com glory days of 2000, and then began a long and slow and painful decline to its nadir in the fall of 2002 before beginning an even longer and even slower and even more painful climb back to where we are today.

I'm not going to offer even a rough prediction of exactly when NASDAQ will rise above 5000 again, let alone when that level will be safely behind us, but I see a number of specific scenarios that could play out with roughly equal probability:

1. A 1% rise on Monday would do the trick. Easy enough, but not necessarily a slam dunk.
2. Within a few days, after some consolidation to give us a more solid and sustainable base to build on.
3. Within a few weeks, after we first have a dip and maybe even a test of support to confirm how solid the base is before rallying to the 5000 level.
4. Within a few months, after we first have a combination of a lot of range trading and at least a mini correction or even an outright 10% correction.
5. Within a year, after we have a solid correction and get through the opening hikes of the Fed once liftoff for interest rates occurs in late summer or early fall.

My money would be on #2, but I'll make do with whatever the market has to offer me. I will be pleasantly surprised if we breach the 5000 level on Monday or even Tuesday. Even so, whether or when we hit an intra-day peak above 5000 is a separate question from when we actually close above 5000. Even if we do break 5000 on Monday or Tuesday, it may take a week or more or consolidation before we can stay above 5000 for more than a day or two at a time. In fact, the 5000 level may not be safe until we can reliably close above the 5100 level.

It is very credible that NASDAQ could rally sharply on Monday and shoot through 5000 - that's what it did on March 9, 2000, with a 150-point rally. Unfortunately, that could also be immediately following by a sell-off once the euphoria of the 5000 high wears off and people revert to the mundane details of the economic and business outlook for the overall U.S. economy and individual stocks. March 10, 2000 gave us the dot-com peak, but that was the end of it, with NASDAQ plunging 466 points in three days. That peak day was actually only 2 points higher than the first day over 5000, even though NASDAQ had rallied by 86 points to it's all-time intra-day peak of 5,132.52.

Ultimately, the hedge funds are now in complete control of the market. If they decide to maintain and even increase their risk-on bias, then NASDAQ 5000 becomes a slam dunk. But if, or I should say when, they decide that the recent advance has run out of steam, and they decide to reverse their bias to risk-off, then down we go. Granted, each hedge fund has its own mind, own bias, and own criteria for risk, so trying to figure out the net bias of these funds is not quite feasible, not to mention the fact that there is zero transparency, so we can only judge their risk bias after the fact and in aggregate by the actual action of the market (and mere tidbits of anecdotal stories in the financial media.) They may decide that they can maximize profits by cashing in now, instigating a modest to moderate pullback, and then reversing again and instigating the final leg to push strongly above 5000 sometime in the coming weeks.

Further upstream, banks and pension funds and wealthy individuals make the call as to how much additional money they may commit to hedge funds, or even whether they might make withdrawals of money, both of which can force the hands of the hedge funds to some extent. And the net impact is an increase in volatility.

Even if we do manage to safely close solidly above 5000 or even 5100 within the coming weeks, it is also very likely that we will face significant corrective action to test the support at the 5000 level at some point within the coming months.

In short, prepare for a significant level of volatility in the coming days, weeks, and months.

-- Jack Krupansky

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