Friday, March 06, 2015

NASDAQ consolidation drags on as 5000 awaits

NASDAQ trading on Thursday was a mixed bag, scoring a moderate advance, but closing only slightly above its opening level and moderately lower than its mid-morning trading level as cynics sold into the rally, and breadth was weak, with plenty of hot stocks losing ground as money rotated and shifted to other stocks which fueled the advance for the day. This was not exactly the trading pattern that builds for an extended advance, but does help satisfy the market's need to consolidate before continuing on to the next leg up of the recent extended advance. We still may need some more consolidation here, but NASDAQ remains well-positioned to resume its run through 5000 on the way to a new all-time closing high, even if it takes another couple of days or couple of weeks for the consolidation to exhaust itself.

NASDAQ futures are down modestly, indicating a modest pullback at the open, but as always, futures and the opening move are not a reliable indicator of the trend for the rest of the day. And its a Friday again, so a fraction of speculators will tend to close out positions ahead of the weekend when anything can happen.

The negative sentiment in futures this morning may be due to the strong jobs report, which will put more pressure on the Fed to be less patient about when they will begin raising interest rates.

There is a fair chance that any early pullback or even further declines this morning will simply be a setup for a subsequent rally. IOW, a classic fake-out move, to trick people into selling and shorting and then to clobber them with a modest to moderate short-covering rally.

It would be an easy hop for NASDAQ to trade and even close above 5000 again, but sustainability is still an issue. We probably do need more consolidation to build a more sustainable base of support for a further advance, but there is nothing engraved in stone that says that consolidation must occur below 5000 as opposed to a bit above 5000 but still short of a new all-time closing high. For now, volatility remains king.

There is a modestly growing risk that as the tug of war over the 5000 level drags out, people will lose patience and enthusiasm and the advance will begin to crumble. It is indeed very possible that hedge funds could engineer another downwards swing to profit from the volatility of a trading range. I wouldn't say that it is the likely scenario, but it's still a reasonably strong possibility.

The jobs report? LOL! Which is better or worse for stocks, strong employment growth that is great for corporate growth, or weaker employment growth which bodes well for a more patient Fed that fuels the flow of cheaper money into the market. Take your pick. There's no consistent view as to what level of employment growth is best for stocks per se. Personally, I'll take stronger employment growth, although more gradual employment growth is probably what is best for a more sustainable market advance.

Even after the strong jobs report this morning, fed funds futures were indicating a 51% chance of liftoff for Fed rates in September, with a second hike in December, assuring low rates through the rest of the year. Futures were indicating no third hike until next March. But expect these probabilities to evolve throughout the day as people analyze the jobs report more closely. September of October still seem to be the most likely timing for liftoff. Sure, various Fed officials want the flexibility to consider liftoff as early as June, but there has been no strong Fed chorus indicating that June would be likely for liftoff. IOW, stock investors can count on low interest rates for the rest of the year.

-- Jack Krupansky

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