NASDAQ struggles to find a near-term trend

Wow, that's really great that NASDAQ managed to set a new all-time closing high, but the near-term trend is far too volatile to judge exactly where we are headed next. Down sharply one day and up more sharply the next is not exactly confirmation of conviction. Personally, I chalk it up to simply the nature of recovering from a long holiday weekend. Sometimes it really does take a couple of days for the market to get back to something resembling a groove following a disruption from the groove.

My biggest concern about yesterday was that it smelled like a classic short-covering rally, which looks great on paper, but can quickly reverse within days as soon as upwards momentum peters out. IOW, expect plenty of volatility ahead.

Some of the smarter and swifter hedge funds may have noticed that too many of their peers were leaning too strongly on the short side of the market after the sharp decline on Tuesday, so the path of least resistance was actually in the opposite direction, so buying the opening dip kicked off the forced buying of a short squeeze, which tends to spiral upwards until all but the most ardent short-sellers have covered their positions. Those short-sellers are now quite exasperated, so don't expect them to respond in a kindly manner in the coming days. Meanwhile, the smarter and swifter hedge funds will take a more neutral view of the market and simply vary their bias to match the immediate market conditions.

We may have managed to poke slightly above the ongoing trading range of 4850 to 5100, but one day does not establish a trend. And without any visible technical support in the 5050 range, and only a modest amount in the 5000 range, it will be difficult for NASDAQ to launch a sustainable advance in the 5100 range.

It remains up to the hedge funds, whether they decide to maintain a net risk-on trading bias, and when they might reverse to more of a net risk-off trading bias. And this can change from day to day. Did I mention volatility?

NASDAQ futures are down modestly, indicating a modest pullback at the open, just a little profit-taking and consolidation after a big up day, but 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 - as we saw so vividly on Wednesday.

It would be only natural to see some profit-taking and consolidation after such a big up day, but... the market so often doesn't seem inclined to follow a pattern resembling rigid rules.

The weekly money flow report from the Investment Company Institute showed a further acceleration of outflows from domestic stock mutual funds. This is certainly a yellow flag, and does concern me, but it may be more a sign that people are losing faith in mutual funds and seeking other and newer forms of investing in the stock market, whether it be ETFs, hedge funds, or some of the innovative investment web sites.

-- Jack Krupansky