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NASDAQ Enters Its Own Private Bull Market

Bull markets are marked by a series of higher highs and higher lows. When looked at from this perspective, with Friday’s closing price of 1774, the NASDAQ is the first U.S. based index to have entered a cyclical bull market within the framework of the overall structural bear market that began in 2000. 

Since bottoming in early March, the NASDAQ has led the charge, outpacing both the Dow and the S&P 500. The NASDAQ is now up almost 40% from its March lows, while the S&P 500 is up almost 36% and the Dow up 30% from their respective lows.

A look at the 6-month chart of the NASDAQ shows a number of positive technical developments:

Source:  StockCharts.com

  • The 50-day simple moving average (NYSE:SMA) will break above the 200-day SMA in two weeks, a confirming Golden Cross buy signal that will bring in more money from the sidelines.
  • The NASDAQ has now been above its 50-day SMA for 47 straight days without once testing this important technical level.
  • The rate of descent on the NASDAQ’s 200-day SMA is slowing down.  Ultimately, the 200-day SMA will need to flatten out and then turn higher in the coming weeks and months to confirm this new bull market. All bull markets are marked by an up-trending 200-day SMA – this one should be no different.

The NASDAQ’s volume surged to almost 2.6 Billion shares on Friday. Most of this heavy buying took place in the final 15 minutes as the S&P 500 neared its 200-day SMA at 928.59. You get the feeling that a lot of institutional and hedge fund money has missed this rally and is now being forced to put money to work at any cost.

From this perspective, it seems clear that any move higher in U.S. equities will be predicated upon investor psychology and the vast sums of liquidity that have been pumped into the system by the Fed. “Big Money” will be put to work expeditiously in the coming weeks, for fear of missing the train before it leaves the station.

In the short term, I expect the Dow and the S&P 500 to play catch up with the NASDAQ. In order for a true bull market reading to be registered, all three major indices have to make higher highs and move above their corresponding 200-day SMAs. Look for the S&P 500 to do this first and then for the Dow to be the last index to confirm these technical parameters.

Unfortunately, with valuations on the indices very high and with the “easy money” already made over the past few months, I envision this cyclical bull market to be very short and uninspiring. The NASDAQ only tallied 46 New Highs on Friday, a very low reading for a new bull cycle. The lack of strong big-stock leadership at the onset of this cycle suggests that we may see only 15-20% more upside before topping out.

A look at the NASDAQ’s 1-year chart shows major resistance looming above:

Source:  StockCharts.com

Heavy and concerted institutional buying will be needed to clear through this band of resistance, a process that could take months to complete. Should the 2000 level be taken out to the upside, another band of very large resistance looms just above this mark, from 2000-2200. 

As is often the case at bear market transitions to bull markets, the NASDAQ's advance/decline line has lagged the index's push to a new higher high. A look at the chart of the A/D line for the NASDAQ shows that it has not made a higher high yet to correspond with the NASDAQ’s new closing mark of 1774:

Source:  StockCharts.com

At the beginning stages of a new bull market, institutional money is initially deployed into safer names that can be trusted. This can be seen in the heretofore strength in Amazon, Apple, Google and RIMM as we have rallied off of the March lows. Look for an improvement in the Advance/Decline line in the coming months as investors gain confidence and put money to work in other names that have not moved too much yet.

Add it all up and this will probably be one of the quickest bull markets that we may ever see. Nevertheless, considering where we were in early March, beggars cannot be choosers. So, just as I have been doing since the market bottomed, I plan to play the hand that has been dealt and ride alongside the money flows in the coming months with selective stock purchases. 

Don’t blink however, as the ride may be over before you can fasten your seat belt. With inflation looming and the long-term “valuation contraction” in equities not completed, we seem doomed to a range bound market for the next 5-7 years. Until this process has been completed, and only after the public has finally sworn off equities, will we then be in position to start a new secular bull market cycle that will last for over a decade.

 

DISCLOSURE:  Author is long QQQQ July calls and double-ETF, QLD.