Monday, March 02, 2015

NASDAQ overdue for some serious consolidation, but... 5000 beckons

All bets are off right now for the precise path of NASDAQ in the coming days and weeks. Some serious consolidation is definitely needed after the recent strong advance off the January low, but the market rarely does exactly what it should do. It's up to individual market participants to decide whether they wish to take money off the table or put more money in.

Generally, the market moves either in reaction to news or to the evolution of the longer-term outlook for the economy and individual businesses or sectors. But sometimes technical charting and psychological factors can overwhelm fundamentals.

The 5000 level of NASDAQ is a very serious psychological milestone, both because it is a big round number, and also due to the significance of the all-time high of NASDAQ in March of 2000 during the dot-com boom. 5049 was the dot-com closing peak, and 5133 was the all-time intra-day peak. That was almost 15 years ago, on March 10, 2000.

NASDAQ spent only a grand total of five days trading above the 5000 level, and closed above 5000 only twice. Again, none of this has anything to do with economic or business fundamentals, but markets can frequently be overwhelmed by psychological factors.

Most of the keys to the coming trajectory of NASDAQ are in the hands of the hedge funds. Although mutual fund managers and pension fund managers certainly have significant influence over the longer term, hedge funds are more prone to be more agile and change their risk bias on a moment's notice. If enough of them decide to increase their risk exposure, then NASDAQ will shoot higher, but if enough of them focus on reducing their risk exposure, then consolidation and even a correction could be in the cards.

Hedge funds come in all sorts of stripes and colors and flavors, so they rarely act in unison. They each have their own trading and risk criteria, which they each tune as they see fit, with zero transparency. We can only see and sense their net trading and risk bias from the overall market action after the fact.

One other interesting factor is that it is tax season, so quite a few individual investors will be pumping money into retirement accounts, which could boost the stock market to some extent through April. Whether they might counteract or reinforce the actions of the hedge funds will remain to be seen, but this will make the next eight weeks an interesting period of time.

NASDAQ futures are up modestly, indicating a modest rise at the open, but whether those gains stick and turn into a decent rally is uncertain. Some participants will choose to sell into all rallies at this stage until a significant degree of consolidation is achieved.

Consolidation is needed to establish a solid base or support for a sustainable market advance. That was a key factor that was missing back in the dot-com era. Granted, fundamentals were really what was missing back then, but consolidation is a great way to cut through psychological frenzy and give fundamentals more of a chance to assert themselves.

-- Jack Krupansky

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