Thursday, May 07, 2015

NASDAQ lurches within its trading range

If you don't love volatility, then this stock market is not for you. The latest weekly data from the Investment Company Institute showed a doubling of outflows from domestic stock mutual funds in the past week compared to the previous week. That is not good news at all, but I would note that mutual funds are not as big a driver of the stock market as they used to be, with ETFs, hedge funds, and institutional investors such as pension and endowment funds exerting more influence. The net effect is that upwards momentum has slowed and is more muted, if not virtually invisible in the dramatic daily volatility. Also, hedge funds are extremely competitive and facing very meager returns, so trading volatility is one of the few games left available to them, and trading volatility only enhances that volatility.

NASDAQ futures are fluctuating between slightly positive and slightly positive right now, indicating a mixed open. Just an hour ago they were down moderately sharply for no apparent fundamental reason. I suspect some hedge funds were trying to engineer a bigger sell-off, or maybe just trying to spook fellow traders into dumping their positions. In any case, that effort seems to have failed, for now. As always, we must caution that futures and the opening move are frequently not reliable indicators of the market trend for the rest of the day.

NASDAQ remains trapped in a trading range. Currently we are in the lower portion of that range. Traders will attempt to test the lower edge of the range, which I figure is around 4850. It is always very possible that we could break below the range, but probably more likely that somewhere in here the hedge funds will reverse their risk bias and go for the easier money by trading back upwards in the range. Up and down, back and forth, is a lot easier money than a pure one-direction bet.

Are stocks overvalued as Fed Chair Yellen suggested? Sure, they usually are, except when the market is extremely depressed. It's only a question of how overvalued. Besides, it's all a matter of supply and demand. Given all the recent IPOs, it would be fair to say that there is significantly greater supply available than a year ago. And the ICI data suggests that there is less demand. If not for the hedge funds furiously pumping up volatility with range trading, stocks probably would be somewhat lower than a year ago, or flat at the best case, sad to say.

What's next? Simple: It's the economy, stupid! Exactly. The direction and health of the U.S. economy will be the primary driver of the U.S. stock market over the long term. Sure, hedge funds can push the market this way and that for a few months max, but over a year to 15 months the trend will be driven by a combination of the current economic data and the outlook for the next six to nine months.

-- Jack Krupansky

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