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Will The Nasdaq Determine The Market’s Direction?

  • Written by Syndicated Publisher No Comments Comments
    March 30, 2014

    The sideways going-nowhere U.S. market since December continues, with the market down in January, up in February, and sideways in March, which has the major indexes, Dow, S&P 500, NYSE Composite, Nasdaq, dead flat for 2014 so far, no progress in either direction since December.

    Even the low interest rate on no-risk cash has matched the market’s performance so far this year.

    The risks are widely known.

    The S&P 500 is overvalued by 53% according to the Shiller CAPE P/E ratio. Investor participation is at levels last seen in 2007, with margin debt at an all-time record high. The bull market is old by historic standards. The average length of bull markets over the last 113 years was 53 months, with very few lasting longer than the average. The current bull is now 60 months old. We are in the 2nd year of the Four Year Presidential Cycle, and over the last 80 years the average decline in the 2nd year was 21%. The main driving force of the bull market was the Fed’s increasingly massive QE stimulus. It is now being cut as swiftly as it was brought on, now at $55 billion a month, down from $85 billion a month three months ago, and will be cut to $45 billion soon (in April).

    But those conditions only indicate the risk, not the market’s direction.

    Markets can always become more over-valued.

    However, there are reasons to believe the impasse will not last much longer.

    For instance, it’s interesting that the Dow is down only 1% from its peak on March 7 (and down 1.5% year-to-date). But the Nasdaq (and Russell 2000) are down 4.7% since their March 7 peaks.

    An old market adage back in the day was that when the generals (the blue chip Dow and S&P 500) look back and see the troops in retreat, they soon turn tail themselves and run to catch them.

    However, will the Nasdaq remain in retreat?

    It has pulled back to potential short-term support at its rising trendline.

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    And to potential long-term support at its 20-week m.a.

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    The Nasdaq is near a moment of truth where it will either find support again at the short-term trendline, and its intermediate-term 20- week m.a., and return to rally mode, or will break down through both.

    It may well pull the rest of the market with it whichever way it goes.

    (Subscribers: See our short-term and intermediate-term technical indicators added to the charts in your Premium Content area for our expectations).

    Other Voices:

    Art Cashin, UBS’ director of NYSE floor operations: “Investors should keep a better look on the housing market . . . It’s showing some signs of maybe bumping into a wall as mortgage rates rise”.

    Jim Paulson, Wells Capital Management: “We’re going to come to a wider acceptance that there is pretty good economic momentum here. Good economic news will be good news for stocks.”

    Business Insiders, Henry Blodget,: “Lots of folks are bullish about stocks these days, despite the valuation measures. One of the arguments these bullish folks trot out when I mention my concerns is that the economy is growing nicely and is expected to continue to grow for the foreseeable future. And, hey, if the economy continues to grow, then stocks will go up! . . . That argument sounds compelling. But there are two big flaws in it. First, just because economists expect the economy to keep growing doesn’t mean it will. Economists have a terrible track record when it comes to predicting recessions (they almost never see them coming). Second, and more importantly, even if the economy keeps growing, that doesn’t mean that stocks will go up.”

    Blodget then goes on to quote from Warren Buffet’s 1999 article in which Buffett pointed out how the market is often disconnected from the economy. Buffett noted that from 1965-1982, the U.S. economy (GDP) grew 370%, and the revenues of the Fortune 500 companies more than sextupled. But the market went nowhere for 17 years (which was Buffett’s forecast for what we would see for the next 17 years beginning in 1999).

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    To see Blodget’s entire article click here: http://www.businessinsider.com/buffett-stock-market-and-economy-2014-3

    Hedge Fund billionaire Seth Klarman (who recently returned $4 billion to his investors because he can’t find anything he’s comfortable buying, apparently willing to give up the fees rather than take the risk); “Six years ago, many investors were way out over their skis. Giant financial institutions were brought to their knees. . . . . The survivors pledged to themselves that they would forever be more careful, less greedy, less short-term oriented. But here we are again, mired in a euphoric environment in which some securities have risen in price beyond all reason, where leverage is returning to rainy markets and asset classes, and where caution seems radical and risk-taking is thought of as the prudent course. Not surprisingly, lessons learned in 2008 were only learned temporarily. These are the inevitable cycles of greed and fear, of peaks and troughs. . . . . Can we say when it will end? No. Can we say that it will end? Yes. And when it ends and the trend reverses, here is what we can say for sure. Few will be ready. Few will be prepared.”

    To read my weekend newspaper column click here:  Why Mutual Funds Managers Cannot Protect Investors In Bear Markets

    Images: Flickr (licence attribution)

    About The Author – Sy Harding, Street Smart Report

    Sy Harding publishes the financial website Street Smart Report Online and a free daily Internet blog at Sy’s Free Blog. In 1999 he authored Riding The Bear – How To Prosper In the Coming Bear Market. His latest book is Beat the Market the Easy Way! – Proven Seasonal Strategies Double Market’s Performance!

    It includes our research and analysis on the economy and markets, and provides charts and buy and sell signals on the major market indexes, sectors, bonds, gold, individual stocks and etf’s, including short-sales and ‘inverse’ etf’s.

    It provides two model portfolios as guides. One is based on ourSeasonal Timing Strategy, one on our Market-Timing Strategy.

    In depth updates are provided every Wednesday, with interim ‘hotline’ updates every time we make a trade. An 8-page traditional newsletter Street Smart Report is provided on the website every 3 weeks, in pdf format for viewing or printing out.

    There is the Street Smart School of online technical analysis ‘seminars’,commentaries to keep you ‘street smart’ about Wall Street, and much more. 

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