Monday, April 27, 2015

NASDAQ tentatively moves beyond the crossroads

Very impressive - NASDAQ is finally at the door of the 5100 level. The resilience of the recent advance has been quite impressive, but... short sprints do have a way of quickly unraveling, so we will have to see how it plays out. Personally, I like to see the market spend at least two weeks above some critical level before concluding that we have support at that level for a sustainable advance to yet another new level. Even the 5000 level is not yet secure. Personally, I need to see NASDAQ close above the 5150 level, solidly, for a couple of days as a prerequisite for considering the 5000 level a solid base as well. In any case, it is finally starting to feel as if the 5000 level may indeed be in our rear-view mirror.

Earnings continue to be mixed, but with enough bright spots and enough relief that things have not turned out even worse than expected. Some of this may simply be the traditional concept of selling the rumors and then buying the news.

NASDAQ futures are up moderately, indicating a nice pop at the open, partially on relief that Europe seems to be bouncing back, but as always we must be cautious that futures and the opening move are not reliable indicators of the trend for the rest of the day. We'll have to see whether hedge funds pile on to an early rally, or whether they instead sell into the rally.

There is some concern that inflows to mutual funds have been volatile and even negative in recent weeks, and that frequently more of the inflows have been to international funds, and that there have been actual outflows from domestic mutual funds in some recent weeks. Traditionally, inflows to domestic mutual funds have been the lifeblood of the stock market, but I see that things have changed in recent years. ETFs and hedge funds appear to be the main drivers these days. Money is a lot hotter than it used to be, especially with hedge funds which can switch their risk bias between risk-off and risk-on at a moment's notice.

For the moment, it appears that hedge funds have switched heavily to a risk-on bias. We should enjoy it while it lasts, but at some stage, likely when upwards momentum seems to be too toppy and petering out, they will flip the switch from risk-on to risk-off and then we will see another mini-correction as we swing down within a trading range. All of this is very unpredictable, other than it will happen eventually. Over the past 18 months it seems like the trading ranges last anywhere from a couple of weeks to a couple of months. The most recent range lasted about six weeks. So, will this one last two weeks or two months or what? Yeah, that's the open question.

Personally, I get the feeling that this range could take us to the 5250 level before the hedge funds throw in the towel, but even that is a fairly wild guess. Sure, based on experience, but there are just too many variables in play. A wide range of possibilities is that the recent advance may actually already be over, to maybe a couple more months taking us all the way to 5500 before we see serious consolidation. The only certainty is volatility.

-- Jack Krupansky

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