Monday, July 10, 2000

NASDAQ - Where To Now?

Well, the unemployment report, coupled with the flat base the NASDAQ has formed over the last 3 weeks, provided the powerful move we saw in the index on Friday. Now the question remains, can the NASDAQ continue to move forward?
Friday's move came on heavier volume than Thursday's, so another day of accumulation, a day in which a major index or stock closes higher and is accompanied by heavier volume than the prior day, occurred. But the volume action wasn't as spectacular as was the action after the last unemployment report on June 2nd, where volume registered 2 billion shares. Several reasons can account for this. First, we're in the midst of summer and allot of traders and portfolio manager take their vacation time during these 3 months. Second, many of the speculators that were around earlier in the year were either wiped out by the March/April correction, or are just to afraid to re-enter the market.
The NASDAQ is also having trouble getting through it's 50% re-tracement area of 4,088, measured by taking the all-time high, subtracting the low reached during this correction and dividing by 2. This is now the critical area to watch. If we can break the this level decisively on heavier volume, the NASDAQ should be able to proceed to the 4,500 area, the site of the breakdown from the double top it formed in March.
If anyone has been paying attention, there has been a rotation out of large cap stocks to small and medium sized companies. The problem with this type of rotation is that even though the underlying market is healthy, the indexes can still go down, since these companies do not have the market weighting to drive the market significantly higher. Any major move in the market is typically driven with the help of large caps. Advancers beating out decliners, and new highs outstripping new lows have accompanied the last few down days in the NASDAQ. This is healthy as it shows that smaller to middle cap stocks are outperforming the large caps. Also, check the performance of the Russell 2000. The index is up for the year, which confirms what I'm saying. If anyone remembers, the move the NASDAQ made from last year through March, the majority of the time decliners outpaced advancers by a wide margin. The large caps command such a high weighting, less of them have to advance for the market to move.
The point: don't let a minor market downturn scare you. Keep looking for stocks that are basing particularly in the small and mid cap area, but don't overlook the large caps. They could come roaring back at anytime. The market is buying stocks that are reasonably valued and have earnings to back up the valuations. The days of 'buy the story' are over for now. If you're still in a story stock, that's free falling, get out. There's no reason why it can't keep falling.

If you have to remember anything, remember the following:
Cut you losses short. Let your winners run, not your losers.
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