Wednesday, May 06, 2015

NASDAQ remains trapped in its trading range

The sad story is that there just isn't enough fresh money flowing into the market to fuel a straight up bull market, so we end up ratcheting up very slowly over an extended period of time and spend most of that time bouncing around in a wide trading range, currently around 4850 to 5100 for NASDAQ. We're currently in the lower half of that range, which means we could move a bit lower, but also that we have a lightly higher probability of moving higher. Its all up to the hedge funds as they constantly shift their net bias between adding risk and removing risk.

The only real certainty here for the short-term is volatility. Sure, the longer-term bullish trend is still in place, but it is hard to see it through the noise of all this volatility.

NASDAQ futures are modestly higher, indicating a modest recovery bounce at the open, but we must keep in mind that futures and the opening move are frequently not reliable indicators of the trend for the rest of the day. The big question is whether people decide to sell into the opening rally to extend the sell-off, or whether they decide that the intense selling pressure from yesterday has dissipated enough for the water to be safe again. A strong bounce-back rally is a very real possibility, but so is a renewed sell-off, or just a lot of trend-less trading in a narrower trading range, all with roughly equal probability.

The latest weekly mutual fund money flow data will be released by the Investment Company Institute sometime today. As of last Wednesday we had four straight weeks of outflows from domestic mutual funds. Traditionally, mutual funds drove the market, but these days hedge funds are a bigger driver. Retail investors and institutional investors such as pension and endowment funds make up the difference.

We'll probably be back up at NASDAQ 5000 soon enough, maybe by Friday or Tuesday of next week and certainly within the next few weeks. The bigger question is how soon we will be solidly above 5100 so that these frequent trips back up to 5000 become a thing of the past rather than a regular occurrence. That could be a month or more. Hedge funds are under more than a little pressure, so they have to make up for meager returns by range trading, making a small profit with each swing downwards and then upwards. Rinse and repeat. There probably is still enough money flowing into retirement funds, including pension funds to keep the overall long-term bull market moving incrementally higher, but with most of the time spent trading in wide ranges as we have done over the past year and more.

We still have a fair amount of anxiety over the mediocre Q1, but incrementally sentiment will shift to focus on the brighter outlook for Q2 and beyond.

The Fed and interest rate hikes are basically on hold until the fall, with fed funds futures indicating liftoff for interest rates in December, with less than a coin-flip chance for October, and a little less than a coin-clip chance of a third hike to 1.00% next April.

-- Jack Krupansky

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