Nasdaq and Tech ETFs: "Dead Cat" Bounce or Actual Bounce-Back?

Writers, analysts, editors, pundits, bloggers. We can pretend that there are a variety of forces that explain the August momentum in stocks... but that'd be pretentious.

How about calling a Dow Jones Industrials Diamond (DIA) a diamond?  There's only one reason that U.S. stocks have become intriguing as of late... and that's because oil prices have been slip sliding lower every day for weeks.

It follows that a $35 per oil barrel drubbing has boosted equities in lock-step. The Dow's DIA has moved 8.5% higher off its July lows.

Is this a "dead cat" bounce, where stocks rally for a brief period, only to succumb to bearish selling pressure once more? Or is this rally the start of something much better for stocks, in spite of the pervasively negative media?

Tough call... and here's why.

Oil doesn't have a genuine relationship with stock assets over time. Even shorter time period assessments would ironically show a positive correlation between the price of crude oil and stocks. After all, oil rose significantly in the bull market uptrend for stocks from 3/03-9/07.

What's more, oil has had far less of an impact in 2008 than the financial crisis/real estate collapse has had. Until June 08, that is. In the summer where "Oil.com" took center stage, stocks were annihilated.

Now that oil is getting crushed in August, stocks have been rising in dramatic fashion. Yet, one can only say that... in the near-term... lower oil prices mean more money in the consumer/small business-person's pocket. Ergo... stronger economy and stronger company growth may result.

Where oil prices go from here, however, is anyone's guess. My guess is that it would likely stabilize at some point, giving the market a reflective pause. In other words, can we trust the banks again? Is real estate getting closer to a bottom? And at what point will the U.S. workers start gaining jobs again... rather than losing them?

So once again, we appear to be at a crossroads of sorts... particularly in tech. Technology stocks were first thought to be immune to the credit crunch. That idea faltered because as other industries slowed, investors ultimately feared that there would be less upgrading for technology products and services.

Others postulated that tech shouldn't be particularly sensitive to oil prices, as that was more of a transport/consumer cyclical concern. Wrong again. Tech seems to be very sensitive to oil prices, and has been a major benefactor of the commodity's recent declines.

The PowerShares Nasdaq 100 Trust (QQQQ), often considered as a tech proxy, is particularly intriguing at this moment. It closed the 8/8/08 weekend above its long-term, 200-day trendline.

Naturally, investors had been sucked in when this happened in May. The worst of the financial crisis was supposedly over with the Bear Stearns bailout.

So will the current run for the quad-Qs have legs? In my opinion, there's a reasonable chance that it will at least have legs to stand on rather than buckle.

Remember that the Bear Stearns bailout in March didn't actually mark the mid-way point for the financial crisis... July likely did. More companies gave more accurate accounting of their balance sheets. The SEC modified short-selling rules. And the government passed sizable homeowner protection legislation.

March did not mark highs for oil... July likely did. At least in the near-term, it does not appear that oil will be surging back to $150 per barrel in 2008. Lower commodities coupled with progress on the financial front may give the favored tech/biotech proxy, PowerShares Nasdaq 100 Trust, a competitive advantage.

So if I am suggesting that this is not the proverbial "dead cat" bounce... and that we're not likely to break through the July market lows... am I suggesting that we're looking at a sustainable bounce back? Not that either.

We're probably looking at a period of time where the market will be range bound. And that makes it tough for bulls and bears alike. That said, if we're unlikely to see new lows, and if the quad-Qs are historically more powerful in October-December, it may make sense to incrementally purchase on weakness.

For the more adventurous, the Goldman Sachs Software Index (IGV) and the Nasdaq Biotechnology Fund (IBB) have provided the Nasdaq with its greatest pop. (Read more about "biotech" in my previous column, "5 Stock Market ETFs That Have Defied the Bear.")

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

Comments

[cynic69:]

“Oil doesn't have a genuine relationship with stock assets over time. Even shorter time period assessments would ironically show a positive correlation between the price of crude oil and stocks. After all, oil rose significantly in the bull market uptrend for stocks from 3/03-9/07.”
You’ve got to be kidding. Here is an idea. With oil at $140 and gasoline at $4.70 (in Ca.) folks are going to reduce their driving. This is going to torpedo the auto industry which will cause the economy to crater. I don’t know about you but I firmly believe that with the economy in the toilet the stock market may get sucked under. What do you think? By the way, with oil at $140 the airlines will follow the cars right down the old flusher.

2008 Aug 13 03:53 AM