Friday, February 27, 2015

NASDAQ tug of war continues

NASDAQ continues its grinding march upwards towards the psychological 5000 level and its March 2000 closing peak of 5048, but it is a brutal struggle along the way and not all stocks are benefiting from the advance. At least some amount of consolidation is seriously needed at some point here, but so far we've had to settle for a lot of intra-day volatility, which is an approximate substitute for the outright consolidation of a true sell-off, but at some point the piper must be paid his due. Meanwhile, the tug of war continues, until... eventually it stops.

In short, NASDAQ is unsure whether it really wants to take a breather here and do some consolidating, or make a surge to a near all-time high. A lot of signs point towards a breather and some serious consolidation, if not outright range trading for an extended period, but... even the most solid expectations are not typically an accurate forecast of actual market movement.

The past couple of days have been driven by a combination of a focus on the Fed, and an incremental recovery of market attention once the Fed was out of the picture. Now its time for the market to get back to coping with the economic and business outlook for the U.S. economy and even individual companies and sectors. Unfortunately, the Fed is still in the picture as people agonize over how long the Fed will be patient and how interest rates will trend once the Fed loses patience, so to speak. Some people still believe that a Fed rate liftoff in June is still likely, but fed funds futures still point to September or October as the more likely time frame for liftoff. Of course, the Fed has already told us that it will be data dependent, so we can expect a lot of volatility as the actual data and perceptions of the actual data and the forecasts for the data vary wildly from month to month, week to week, and even day to day.

NASDAQ futures are modestly negative, indicating a modest pullback at the open, but once again the true trend for the day is not reliably predicted by futures or the opening move.

There is a very good chance that NASDAQ will poke through the 5000 level today, but even if it does, there is no certainty that it will close above that level or even get near the March 2000 closing peak level or intra-day peak. Besides, it is a Friday, so we could also see the volatility associated with a fair fraction of speculative market participants covering positions in advance of the weekend, when anything could happen, especially with Greece, Ukraine, and oil in play.

Regardless of what does happen today, I would wait to see where we are after Tuesday and Wednesday before concluding whether the 5000 level looks to be a solid reality for NASDAQ or merely a flash in the pan or even a mirage.

As always these days, the main market trend is completely in the hands of the hedge funds, who can change their bias between risk-on and risk-off at any time. They may decide to go all-in to ride the NASDAQ 5000 euphoria, or they may decide to cash out before the end, or anywhere in between. Each fund has its own risk management criteria, so we can only sense the net risk bias overall and only after the fact as the net sum of all of their individual actions.

I am prepared for some number of modest to moderate dips in the coming months, with plenty of volatility, but it is still worth noting that a bull market traditionally likes to climb a wall of worry. Ultimately, it is a matter of money flows and how much risk people are willing to take on, and the relative risk and reward perceived for U.S. stocks versus other asset classes. Overlaid on that underlying trend, we have the hedge funds playing the swings of occasional dips and range trading.

-- Jack Krupansky


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