June 28th, 2012

Follow the Leader: S&P 500 vs. Nasdaq Composite

The big build-up for the Supreme Court decision on Obamacare turned out to be a big dud (from the stock market perspective, that is).  The decision came, the market reacted for most of the day and, then, at 3:30 some new rumors concerning the European meeting this weekend surfaced and the market did a 180° turn and wound up the day nearly flat.  So the Talking Head’s discussions about how a court decision would bring certainty to corporate CEOs and finally encourage them to start hiring turned into a discussion about how it’s really uncertainty concerning the financial cliff, uncertainty about the future of the Euro, lack of transparency about the business prospects for the remainder of the year, yada, yada, yada.  I can’t hope to try to sort all that out and don’t want to pretend, like they do, that I do have it all figured out.  All I hope to be able to do is to try to remain nimble enough to perceive in which direction the majority seem to be leaning and, when the a trigger is pulled to launch some directional momentum, to climb on board for the ride.

For the past couple of days, one of the recurring themes seems to be that money is flowing into dividend and defensive stocks and out of tech and other growth areas due to what some have now discovered to be the leading edge of a world-wide recession, close to a world-wide depression.  I notice that the tech stocks in my portfolio, the stocks that had accounted for much of my Portfolio’s gains during the first half now seem to be lagging so,of course, the Talking Heads no say that tech does and will continue to suffer from the “world-wide recession”.  So I decided to step back and take a longer-term comparison of the Nasdaq Composite relative to the S&P 500 (click on image to enlarge):

True, the Nasdaq composite has diverged from the S&P 500 at different times but, over a nearly four year comparison, the similarity of the two indexes has been incredibly close.  If anything, the Nasdaq has been slightly more volatile of the two as to be expected.

This comparison drives home the truth of Benjamin King postulated in 1966, a principal that has been a core of my portfolio management philosophy for many years:

“50% of a stock’s price movement can be attributed to the overall movement in the market, 30% to the movement in its sector and only 20% on its own.”

Should I follow the Talking Heads and move money from tech stocks to more defensive stocks?  Probably not because if the market continues to correct tech stocks will too but if the market finally successfully crosses above the 1360-1365 zone of resistance then Nasdaq stocks will zoom higher.

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February 3rd, 2012

Launching The Next Tech Bull Market

The big news today is that the Tech sector, as represented by the Nasdaq Composite Index, crossed into territory it hasn’t seen for more than 11 years (chart below is as of noon; actual close was 2905.66).  What this means is that the average Tech stock has surpassed the previous high set before the market’s collapse in the Financial Crisis Crash of 2007-09; new highs are breaking out in many tech stocks.

With the market measured in terms of my preferred benchmark, the S&P 500 Index) having risen by more than 22% since the October low, it’s probably a great time to ask the following two questions:

  1. What does “market timing” mean (or more correctly, what do I mean when I use the term “market timing?”) and
  2. With the market having gone up so far, it isn’t the time to jump in but rather the time to take profits and exit?

I’m not sure there are any “correct” answers to these questions …. and don’t let anyone who gives you an answer tell you that it is the correct one ….. there are only opinions.  So what I’m about to offer is my opinion and the discipline I intend to follow as hopefully the market enters into its next bullish phase.

To me, “market timing” means catching the beginning of a big wave and staying on until the end.  The most fun (read “fastest, easiest gains”) is in the earliest part of the ride; the hardest, roughest part is towards the end.  Earnings are multiples higher than they were in 2000 so, with the average tech stock now reaching heights it hasn’t seen in over a decade, I’d say this is the beginning of that ride.

That’s not to say that this ride won’t hit some bumps along the way.  There probably will be a retracement back to that resistance trendline at the 2007 high sometime over the next year in the form of a “buyers’ remorse correction” as many will second guess the advance in the light of some bad news (we can’t predict what that bad news might be but the “Talking Heads” in the business news media will create a story and claim that it’s the cause).  But that, too, will pass and the market of tech stocks will continue advancing.

Within the realm of possibility is seeing the Nasdaq Composite nearly double over the next 3-4 years and test its all-time high of 5132.32 made in March 2000.  It will take determination and iron nerves but it could also be extremely rewarding if you pick and stick with the right tech stocks and, if you make a mistake, quickly cut your losses.

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December 22nd, 2009

Nasdaq 100 Jewels Beginning to Appear

I happened to catch Carter Worth of Oppenheimer & Co. on Fast Money tonight and I was amazed to hear him agree with me or, as he might see it if we ever had a chance to meet, that I agreed with him. It’s fascinating how two experienced technical analysts can look at charts and arrive at identical or, at least, similar conclusions.

Carter anticipates a short, shallow correction followed by a continuation of the bull market. What was even more striking to me, however, were his specific stock recommendations: IBM and AMGN. Not only did he see some upside opportunities in those charts but, dare I say, he liked them from a fundamental perspective also. For example, he pointed out that while IBM is at the same price it was at its peak 10 years ago, today’s P/E is around 11 as compared to the over 40 P/E back in 1999 (unfortunately, I failed to note the actual numbers). Amgen presented a similar technical and fundamental picture.

Carter may have been constrained by the broadcast schedule but, without those constraints, I had seen the same thing for some time and would even go father and say that the one area of opportunities in the next leg of the bull market (after the correction we both see coming in the coming New Year) is among nearly any of the large-cap Nasdaq stocks.

Scrolling through long-term charts (10 years or more of weekly and 9-day price/volume bar charts) of the Nasdaq 100 stocks and underscores one or more of the following common bullish characteristics:

  • 54 of 100 are have “bull crosses” alignment in their moving averages (price>50>100>200>300-DMA)
  • 74 have “golden crosses” in their moving averages (100>200-DMA)
  • 41 of 100 have 300-DMA that are upward sloping
  • about to break into new all-time high territory
  • successfully testing recent past resistance levels as support levels
  • breaking above extremely long-term downward sloping resistance trendlines
  • stocks in the group have out-paced the S&P 500 Index in that: 29 exceed their levels when the S&P peaked in October, 2007, 64 have better performance than the S&P since the S&P peaked and 54 have performed better than the S&P since the March 9 bottom

Contrary to the views of some readers, I am not a perma-bear. Actually, I usually remain optimistic much longer than I should and actually have a difficult time of restraining myself from buying stocks. But there are times when caution is warranted and the market’s recently being locked in a 2 percentage point channel is one of them.

But I would be remiss in not mentioning that the Nasdaq Composite has recently broken above a similar horizontal channel indicating that some NASDAQ 100 stocks have already begun climbing.

Some components of the Nasdaq 100 look awfully compelling, like ORCL:

and AMZNand IBM

It’s exciting, about as exciting as it felt back in March with all those clear reversal bottom patterns (remember, “shooting fish in a barrel”?). So far, however, it’s only a prospect, a possibility rather than a strong momentum ride on which to piggyback. After the correction Carter and I are expecting, however, this will be the place I begin mining for new opportunities.