Monday, May 11, 2015

NASDAQ is struggling but optimistic

NASDAQ has managed to claw its way back up to the magical psychological 5000 level, but only just barely. It faces headwinds, as they say, but there is some cautious optimism as well. As they also say, a bull market climbs a wall of worry.

This may be the week that gives us the answer as to whether the traditional "sell in May and go away" calendar trading pattern will hold sway this year. So far it hasn't, although people remain worried.

More worrisome may be the track record of significant outflows of cash from domestic stock mutual funds over the past month, but even that may be overrated. Besides the dominance of hedge funds and institutional investors, a new factor may be the rise of the robo-advisors, including services such as Motif Investing, Wealthfront, and Schwab's Intelligent Portfolios, all alternatives to traditional mutual funds for retail investors. I almost get the impression that the younger generation is more inclined to take a social approach to investing rather than their father's mutual funds. So, there are some risks, but there are some opportunities as well.

NASDAQ futures are up modestly, indicating a modest rally at the open, but as always we must caution that futures and the opening move are frequently not reliable indicators of the trend for the rest of the day.

I never trust a market move on a Friday. People are closing out the week and may have a completely different outlook on Monday morning after having had time to contemplate the events of the past week and to more fully work out in their heads how they expect or hope or worry that the market will perform in the coming week. IOW, they start the week with a blank slate. But of course everybody has their own pet theory of what the world will look like going forward, so Mondays are an invitation to dramatic volatility.

NASDAQ is positioned modestly above the middle of its recent trading range of 4850 to 5100. It is so difficult to say whether  the hedge funds see more profit potential by letting the market rise a bit more before reversing and trading downwards again in the trading range, or just throwing in the towel and start the next downswing now. We'll soon see whether they sell into the opening rally or buy any dips during the day. To me it feels like NASDAQ has a bit more to run before the next major downswing in the range, but this is no slam dunk by any means.

NASDAQ still hasn't established any decent support above the 5000 level, so there is significant risk that even if we have a couple more up days above 5000, we may quickly slide back down into the 4900 range. One of these months we will finally establish a solid beachhead above the 5000 level. My preferred beachhead is when we see one or more down days above 5000 that stay reasonably above 5000, but then see a couple of solid up days to confirm that the support is really there.

-- Jack Krupansky

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