Wednesday, April 22, 2015

NASDAQ frets at the crossroads some more

Hey, great, NASDAQ popped up above the magical psychological 5000 level again yesterday, but not with a lot of enthusiasm, and the early rally quickly ran out of steam. About the only good news from yesterday is that it didn't turn into an outright sell-off. Seriously, that actually is good news, but that goodness has a seriously short shelf-life, so if NASDAQ doesn't rally a little more strongly in the next couple of days, the hedge funds will have no choice but to switch to a risk-off bias and trade back downwards in the wide trading range. That's not to suggest that as the likely outcome, but simply to make the risk clear.

As with all of my recent crossroads references, we are still looking at equal probabilities for starting a new leg of the overall bullish advance above the trading range, or a reversal and another swing downwards in the wide trading range, or trading within a narrower range. The only certainty is volatility, as we saw with the big swing down on Friday and then up again on Monday.

The so-called earnings recession is effectively a reality. Even in cases where companies meet or beat estimates for earnings, they frequently either miss on revenues or offer lowered outlooks. The strong dollar gets some of the blame here as well. And the winter weather as well. To me, these are mostly short-term issues, which of course is the time frame and mind set for most traders, so any stock dips due to these short-term issues should be buyable dips for longer-term investors or even swing traders. That is not to suggest that stocks couldn't become significantly cheaper in the coming months, but that news on the earnings front will get rosier a few months down the road.

NASDAQ futures are down moderately, indicating a little pullback at the open. That reflects some trader anxiety that the rally may have run out of steam, which is the main takeaway from the fact that NASDAQ closed yesterday well below the level it opened at.

Fed funds futures point to liftoff in December, although there is almost a coin-flip chance that liftoff could occur in October. There is only about a coin-flip chance of a second hike next March, so we are still talking about an expectation of very low interest rates for a full year at this stage. Personally, I expect the economy to bounce back from the winter slowdown strongly enough that October will soon become the likely time frame for liftoff. I would go so far as to suggest that this December vs. October struggle may be the reason that people are worried about stocks right now - a feeling that that economy is weaker than people feel comfortable with. As I said, the outlook will be rosier in a couple of months.

I'll continue to focus on buying big dips of quality stocks with an expectation of holding for one to three weeks for a 5% gain. I have some flexibility, so in some cases three weeks could stretch into months, but it is the quality of the stock that drives the decision for me to hold longer.

-- Jack Krupansky

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