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Speculative Nasdaq Leadership Now Lags Larger Nasdaq Stocks The war rally off of the March 2003 low was led by the more speculative names within the Nasdaq index. As shown in the long-term chart below, a comparison of the relative performance of the entire Nasdaq (which includes the smaller and more speculative names) to the Nasdaq 100 (or $NDX which includes only the largest 100 companies in the Nasdaq) indicates that the entire Nasdaq outperformed the largest 100 from the March of 2003 to late January of 2004 apparent top. This is in sharp contrast to the late 1990’s timeframe that led up to the March 2000 bubble top. At that top, the Nasdaq 100 had leadership, and then it lagged after the market topped and then plunged. Now, as illustrated in the chart below, the ratio’s 50 day has crossed the 200 day moving average to the downside, indicating that the more speculative Nasdaq names are now lagging the Nasdaq 100. The Rule of Alternation suggests that the market usually doesn’t act the same way two times in a row. Can the Nasdaq continue its rally with its leadership coming from its “blue chips” as it did prior to March of 2000, or will we need resurgence in leadership from its smaller speculative stocks for the rally to continue? Or (as I think) is the Nasdaq rally on its last legs? Let’s look at some more recent comparisons of the Nasdaq 100 to the total Nasdaq.
Below is a 2-year weekly chart of the Nasdaq 100 to total Nasdaq ratio. Note that for illustrative purposes of trading volume, I have included the Nasdaq 100 in the numerator, and the full Nasdaq in the denominator of the ratio.
There was a clear downtrend during the rally indicating that the more speculative Nasdaq names were leading the rally. However, in March of this year, the downtrend was decisively broken indicating that the Nasdaq 100 “blue chips” are now leading in relative performance versus the full Nasdaq. This is also shown in the MACD, which indicated a “buy” of the Nasdaq 100 relative to the full Nasdaq. The new trend was confirmed by the crossing of the 50- and 200-day moving averages. It is notable also that the rally was initiated in March 2003 by Nasdaq 100 leadership. Once the market “got its queue”, the leadership roll was quickly taken up by the broader and more speculative high-beta Nasdaq stocks. Finally, note that the Nasdaq 100 trades in a liquid fashion via the index-traded Amex-listed QQQ shares where over 110 million shares typically trade in a single day. The trading in the Nasdaq 100 (QQQ-shares) has been disproportionately high compared to the volume of the entire Nasdaq over the last few weeks. Is this an aberration, or is there some other fundamental reason why this is occurring? Two Interesting and Key Trading Days The more recent daily trading rally is of interest. I would like to look at two recent important days of trading – Monday, May 17th and Tuesday, May 25th. Daily charts of the Nasdaq composite, and the index-traded QQQ shares are below.
Notice that on Monday, May 17th the Nasdaq index appeared ready to break its previous support (1,900) decisively. This would have done severe technical damage to the Nasdaq that a world full of chart watchers would not have been able to ignore and not act upon by selling. The Nasdaq hit its low for that day at almost mid-day. However, by the close, the Nasdaq QQQ shares traded almost 150 million shares or about 10% of the Nasdaq’s total volume. On an average day, the QQQ shares typically trade only about 6.4% of the Nasdaq’s total volume. The day finished with a bullish “morning star” candlestick, where the bears dominated in the morning and bulls dominated the afternoon session. While the volume of the QQQ shares was well above an average day’s volume, the volume of the Nasdaq was below average. The May 25th start-to-finish rally saw the QQQ’s once again trade 10% of the Nasdaq’s volume, which was well above average as indicated on the chart above. Beside a heavy day of trading for the QQQ’s, the advertised “follow-through rally” showed unimpressive volume for the entire Nasdaq. Unimpressive or not, the QQQ-inspired “follow-through day” produced additional buying from the momentum traders such as those who follow the momentum-based Investors Business Daily’s “Canslim” method, as William O’Neill’s paper declared that the stock market was now in a “confirmed rally”. Previous to the May 25th rally, IBD disciples were safely in cash. The strong market action likely attracted a host of other “hot” momentum money from both institutions and the public. Mixing metaphors, Pavlov’s dogs came to get their cheese again. As with many hot guru methods, for the moment, momentum has become the market. Did suspect buying of the QQQ shares intentionally mobilize the “momentum crowd”? Is Something Afloat? Am I suggesting a “conspiracy theory,” or is the trading action on the QQQ’s just an aberration? Does the market suddenly favor index funds more so than it did just a few weeks ago, or are the Q’s merely a trading vehicle for organized market manipulation? Can markets be manipulated over the short, intermediate, or even long term? Are they being manipulated now? The following may stimulate some thought. It is an excerpt from The Great Crash 1929 by Galbraith, (written in 1954) describing a typical “pool” operation where, in the old days, individual stocks were “run up” to the benefit of corporate insiders who sold their shares: “The nature of these operations varied somewhat but, in a typical operation, a number of traders pooled their resources to boom a particular stock. They appointed a pool manager, promised not to double-cross each other by private operations, and the pool manager then took a position in the stock which might also include shares contributed by the participants. This buying would increase prices and attract the interest of people watching the tape across the country. The interest of the latter would then be further stimulated by active selling and buying, all of which gave the impression that something was afloat. Tipsheets and market commentators would tell of exciting developments in the offing. If all went well, the public would come in to buy, and prices would rise on their own. The pool manager would then sell out, pay himself a percentage of the profits, and divide the rest with his investors. While it lasted, there was never a more agreeable way of making money. The public at large sensed the attractiveness of these operations, and as the summer passed it came to be supposed that Wall Street was concerned with little else. This was an exaggeration, but it did not discourage public activity in the market. People did not believe they were being shorn. Nor were they. Both they and the pool operators were making money, only, that the latter were making more...” Of course with the strict regulation applied by the Securities and Exchange Commission (SEC) that we have today, such pooling to support the market is not possible…. I mean, look how they blew the whistle on fund late trading. What’s that? Mr. Sptizer did that, and not the SEC? Well, never mind! Are entire indices being manipulated in a very large scaled “pool operation” that mobilizes momentum players in much the same way that the public was mobilized in the 1920s? This is just presented as food for thought for now; but I smell fish. It seems that in this environment, anything is possible. Quoting Woody Allen, “It’s tough not being paranoid when everybody is out to get you!” Today’s Market The Dow was down 68 (0.65%, 10,196), the S&P 500 was down 13 (1.2%, 1,117), Nasdaq was down 27 (1.44%, 1,960) and the Russell 2000 was down 11 (1.94%, 562.5). Volume was light as has been the case for several weeks. It appears that Oracle, featured in my Market Wrapup last week, may have broken key support today:
However, note that as with the overall Nasdaq, when a head-and-shoulders pattern fails, it has failed sharp and tradable. However, if Oracle fails to recover soon and sharp and reclaim previous support at about 11.25, then the odds would favor a swoon down well into the single digits, as discussed in detail in the previous article. The dollar was up slightly. Here are long (3 year) and short-term (6 month) charts showing the predominant trendline.
Note that after a visit above the trendline, the dollar is back within its long-term trendline. The 10-year note was up 9/32 and yields 4.71%.
You would have thought that bonds would have been able to rally more with all of the bond-friendly economic data from the government put out over the last couple of weeks. It will be interesting to see what tomorrow’s unemployment data will bring. With Intel’s positive mid-Quarter update to support the stock market, I wouldn’t be surprised to see soft unemployment data to support the bond market and the carry trade. Gold was down, and now appears to be in an intermediate term trading range. In spite of parabolic moves up and down, the long-term chart of silver is healthy.
Costco and Wal-Mart posted good results today. In my view, this is at least partially a result of inflation. (The inflation that is so tame according to Fed-speak.) Speaking for my family, we now do bi-weekly trips to Costco. Have a great evening! Martin Goldberg
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