By Mark Arbeter The Nasdaq, after jumping 25% from its Jan. 2 low, saw some much expected and needed profit taking late last week, and now looks poised to start moving higher in the near-term.
The major plus for the week was that the Nasdaq was able to withstand a barrage of poor fourth quarter results and negative early 2001 forecasts to end Friday in pretty good shape. The index was given many reasons to crack again but passed an important test and is now in a position to take a run at the 3000 area.
One very impressive aspect about the Nasdaq is that price and volume have moved together on almost every day this year. Higher prices have been accompanied by an increase in volume while lower prices have occurred on declining volume. This trading pattern, not seen in many months, is very bullish and suggests good accumulation or buying pressure by institutions. It also tells us that selling pressure has lightened up considerably. These two factors (increased buying, decreased selling pressure) are a must for any kind of extended move higher.
As we said last week, the Nasdaq broke above a downward sloping
trendline that has contained the index since early November. This week, the Nasdaq took out the bearish trendline that has contained the market since Sept. 1.
Another positive for the index is the fact that many technical indicators moved to overbought levels not seen since the spring and summer of last year. This probably induced some of the profit taking this week but is actually a positive moving forward as it demonstrates just how strong the Nasdaq has been relative to the past couple of months.
The three different up/down volume models we run on the Nasdaq are all bullish for the first time since early June. The market did have a nice run into mid-July, but these buy signals were reversed in about the third week of July and the market eventually rolled over in early September and crashed once again. Typically, when our up/down volume indicators give buy signals, they are for an extended bullish run. That could very well be the case this time as the Fed is now in the bullish corner while it was just finishing up its tightening program in mid-year.
Other internal measures such as new 52-week lows have fallen to almost zero, another bullish sign. New highs however have not increased that much as many tech stocks are still building bases after getting taken apart. As the index recovers, we do expect that the number of stocks breaking out will increase by quite a bit. An expanding new high list is also required for an extended run to the upside.
One sentiment poll, Consensus, which measures the percent of bulls on stock index futures, has been near 20% for the last four weeks. This is the lowest reading for this sentiment indicator over a 4-week period since April/May 1994. Other sentiment polls have moved to levels not seen since Fall 1998. The opposite has occurred in the bond market where sentiment recently moved to the most bullish levels since the multi-year yield lows seen in October 1998.
When most are bullish on bonds and bearish on stocks, it is an excellent bet to take the contrarian side. Arbeter is chief technical analyst for Standard & Poor's