Despite Volatility, Trend in Nasdaq Encourages Bulls
The Nasdaq composite stock index plunged more than 3% on Jan. 24 on record share volume, suggesting that a long-anticipated downturn was likely to settle in.
Two weeks later, on Feb. 8, the index surged 2.5% on near-identical volume, lifting it to yet another new high in its four-month uber-rally.
So which day--if either--tells you more about the market’s next big move?
For investors searching for clues to the red-hot technology sector’s near-term trend, watching the tech-heavy Nasdaq index, along with Nasdaq share volume, has become far more important than tracking the blue-chip Dow Jones industrial average.
The Nasdaq index has rocketed 54% since late October, so it seems only natural to expect some sort of sharp correction in the near future. After all, the Dow and the Standard & Poor’s 500 have slid in the last few weeks, and Nasdaq’s continuing climb has become notably ragged.
On Wednesday, Nasdaq was up almost 57 points at one point, then slipped in the final 40 minutes to end the day up a mere 6.88 points at 4,427.65. The Dow sank 156.68 points to 10,561.41.
But despite sharp and increasingly frequent intra-day swings, Nasdaq has performed extremely well overall in recent weeks, many Wall Street bulls point out.
The index is down only 1.3% from its Feb. 10 closing high, even after suffering two pullbacks last month that each clipped more than 10% off its value.
An 11.5% pullback occurred in the first week of the year. Nasdaq then fell almost 13% in late January. But both declines gave way to new rallies.
Perhaps more important, Nasdaq’s price and volume patterns have continued to look positive to many technical analysts who track such things for clues to future performance: Sell-offs have been accompanied by falling volume, whereas rallies have come on heavier action.
“Based on the facts I’ve got in front of me, Nasdaq is in good shape,” asserts Greg Kuhn, general partner of Kamco Partners, a hedge fund in Easton. Pa.
In late January, several Nasdaq stocks that led the fourth-quarter rally showed signs of giving way, Kuhn said. But they’ve rallied this month, he said. For example, Copper Mountain Networks is up 39% the last two weeks after reporting strong earnings. BroadVision is up 43% this month. And Network Solutions is up 40%.
“I see enough stocks that were leaders in the fourth quarter coming on again,” Kuhn said--suggesting that investors aren’t afraid to keep buying.
However, Kuhn and others acknowledge that warning signs abound. Though Nasdaq has continued to notch new highs, it has done so in less-convincing fashion than in the fourth quarter. Also, new highs lately have quickly been followed by renewed selling.
Analysts find other reasons to worry as well. The number of Nasdaq stocks making new 52-week highs each day is starting to recede, while the number dropping to 52-week lows each day in rising, said Mike Hurley, technical analyst at E-Offering in San Francisco.
Richard McCabe, technical analyst at Merrill Lynch in New York, expects the Nasdaq index to soon drop into a correction of about 20% that will last two to three months.
Nasdaq daily trading volume now averages a record 160% of New York Stock Exchange volume. High figures like that have historically pointed to excessive speculation in risky stocks, McCabe said. That kind of activity often precedes sharp market downturns.
McCabe also notes that the Nasdaq index’s progress has been particularly choppy in recent weeks. The range between intra-day highs and lows on the index and among many individual tech stocks in the index has been widening. That’s a sign of rising volatility, which often suggests rising levels of investor uncertainty.
Nevertheless, the Nasdaq trend that has most impressed the bulls recently is the difference in trading volume during rallies and declines.
Market technicians like to see the index rise on days when trading volume is heavy. They also like to see any index declines accompanied by lighter trading volume.
In general, that’s what has occurred in recent weeks. After the Jan. 24 sell-off on volume of almost 2 billion shares, most of the selling in key Nasdaq stocks in the next several days was on lighter volume, a clue that big investors weren’t rushing for the exits.
The rally that followed that period occurred amid a jump in volume, which suggested that investors were again eager to pile in.
Some analysts also are encouraged by the performance of smaller stocks, which aren’t as important in Nasdaq as major tech names, but still lend support to the index.
“After years of under-performing the S&P;, we see an important shift in investor tastes toward the smaller names,” Hurley said.
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Tale of the Tape
Stock market technicians’ trying to gauge how vulnerable the highflying Nasdaq composite index is to a significant sell-off note that the indexs recent pullbacks have occurred amid slowing trading volume, whereas rallies have occurred amid rising volume. That suggests many investors still are more interested in buying than selling the leading tech stocks that dominate Nasdaq. The indexs recent trend, plotted with total Nasdaq daily share volume (in billions):
Source: Bloomberg News
