The Curious Case of the Nasdaq Composite

by Dan July 6, 2011 8:52 am • Commentary

Investors’ odd obsession with Nasdaq stocks that under/out -perform the SPX has been pronounced in this most recent market cycle as we saw a relatively orderly sell-off from early May to a very sharp V reversal last week. 

The chart of the Nasdaq Comp below shows that the index did what a lot of technicians would expect it to do in a decline……go back to support, hold and then rip.

[caption id="attachment_3070" align="aligncenter" width="300" caption="1 Yr Nasdaq Comp Chart Provided by Bloomberg LP"][/caption]


I guess more impressively the chart had a few closes below its 200 day moving average, but never breached the important 2600 support level.  The Nasdaq is both plagued and benefited by some silly stocks like AMZN, NFLX, LULU, WYNN and SINA which can accentuate the relative performance especially on a day like yesterday that for most major indices consolidated (except the Nasdaq).  Even though most of those stocks are in the SPX they have greater pull in the tech heavy Nasdaq which is what lead the powers that be to lower the weighting of AAPL back in May from ~20% to ~10%.  The Nasdaq has almost done a 10% round-trip from the early May peak to last week’s low to yesterday’s close.

Chart below of the SPX shows how even in the throes of the sell-off 2 weeks ago the SPX held its 200 day moving average and never quite got to the previous low and long standing support of 1250.

[caption id="attachment_3073" align="aligncenter" width="300" caption="1 Yr SPX chart provided by Bloomberg LP"][/caption]

I guess this is significant because there are less speculative issues in the SPX, but it also tells me that the Nasdaq Comp will overshoot on the downside and upside extremes. Because of the nature of some of the weird names listed above and the the attraction of day traders and shorts to those very names there are times in between where they can clearly exhibit some relative strength.   Yesterday, for example, when almost all indices worldwide took a breather, the Nasdaq was up a third of a percent….why? Well, less speculative names like AAPL, AMZN and GOOG were all up about 2% and then names like NFLX up 8%, SINA up 5.5% and OPEN up 8.5%……make no mistake about it, there is a little tech stock mania going on here, I am not going to use the B word, but I have seen this movie before and I know how it ends.

The latter half of June had basically downbeat earnings / guidance from TXN, NOK, RIMM, ADBE and ORCL…..while all but RIMM and NOK weren’t disasters, they were cautious enough to take some pause as we head into earnings next week and especially as we expectations just got supercharged with the rally that we saw in most names.

My advice, as we get a look at INTC and GOOG’s results next week, is to proceed with caution until we get sense for the Q3 outlook… which has a tendency to be seasonally weak.

Implied volatility in most names has come in a lot over the last week, and with the VIX at 16, there may be plenty of opportunities to express directional views or to consider stock replacement into earnings events.

I remain cautious and skeptical of last week’s rally as it might have been the perfect storm at an oversold condition, aided by the usual quarter/month end shenanigans.  News in Europe continues its never ending saga now with a downgrade of Portugal debt causing the Euro to weaken against the dollar and could cause equity weakness as we head into an ECB rate decision tomorrow that the markets have clearly baked in a 25bps raise.