Uncategorized, Weekly Update

Is the Nasdaq Due for a Breather?

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Published June 5, 2020


Stocks have just unleashed their all-time best 50-day performance in history. Some think it might be due for a break. The support for that argument comes as the Nasdaq 100 (QQQ) has run right up to its prior high point – e.g. it’s on the verge of an all-time high price. Usually, there is some resistance to buying at an all-time high price (who wants to pay the highest price ever for something?). That resistance eventually gives way as new information supports paying more. But initially, there is some balking. We find ourselves at that point this week.

Adding further likelihood that we will experience that resistance is just how incredibly far we’ve come – a 30% round-trip in less than four months (unheard of!).

QQQ 30% roundtrip in less than four months

The argument gets more support as we see the increasing number of difficult days for the Nasdaq’s flagship sector – software. There have been four relatively high-volume days over the past couple of weeks. Three of those four days have resulted in more selling than buying – e.g. prices declining, with the fourth being a dead-heat between buyers and sellers (a so-called “churning” or “stalling” day where lots of trading volume results in no price movement). See the software ETF below with those four days marked by the arrows.

Software sector increasing number of difficult days

Finally, this all comes as the ratio of puts and calls visits its lowest point in years, meaning a lot more bets on a higher market and relatively few bets on a lower market – a sign of potential short-term complacency (circle below).

More bets on a higher market and relatively few bets on a lower market

So, a rip-roaring rally in the face of dire (albeit improving) economic data while the leading index is testing its all-time high, and that index’s leading sector is encountering some selling.

Maybe it means we see some sideways trading for awhile in the Nasdaq? Let it gather up some strength for the push to new highs?

None of this talk about the Nasdaq (QQQ) suggests that the other indexes won’t continue to power ahead. The newly-found strength in financials, energy, small-caps, emerging markets, et al. could continue onward and upward while the Nasdaq rests. We shall see.

Market Update

Stocks blasted higher this week as optimism over a quick economic recovery hit a higher gear. A tick upward in the manufacturing index fueled a +0.4% lift Monday. Another +0.8% was added Tuesday on reports of a deal between Russia and Saudi Arabia to extend oil production cuts. European shares took flight on word of coming government stimulus in Germany. Stocks rose another +1.4% Wednesday as strength in cyclical and international shares continued to surge. The international share rally is being driven in part by a three-week slide in the U.S. dollar, the result of increasing central bank and government economic support in Europe. A bit of a step back in stocks Thursday as the Nasdaq approached record highs. That index gave back -0.7% on the day. Friday’s surprisingly positive employment report got the bulls running again, however. A +2% rally in the large-cap indexes and double that in the small-cap index as the employment report validated, for now, the market’s hopes for v-shaped economic recovery. Indeed, the Wall Street Journal noted that the recession was ‘over’ already, amounting to essentially a sort of natural disaster that had come and gone, leaving lots of cleanup but a return to normalcy ahead.

Stocks roared higher this week with the S&P 500 leaping to a +4.94% gain. The Nasdaq 100 (QQQ) lagged behind with a +2.71% rise. Small-caps, filled with cyclical stocks, took flight with a massive +8.12% rally.

Warm wishes and until next week.