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Nasdaq 100 Now a Laggard
Trends Suggest Weakness for the Stock Market

If the bull market is to continue, recent trends indicate that it will have to do so without the leadership of the Nasdaq 100. While history doesn’t repeat exactly, there are many parallels between the Bull Market which topped in March of 2000, and today’s. At the March 2000 top the Nasdaq 100’s performance topped in comparison to the S&P 500 as well as Johnson and Johnson (JNJ). Today it appears that similar relationships are occurring and this could spell trouble for the Nasdaq’s performance in the immediate and longer term future. Following Cisco’s reported quarterly results it appears that large technology companies perform and grow like non-technology companies. May be there are a few on Wall Street who are whispering that technology companies deserve similar P/Es to non-technology companies while they quietly are selling. If this is what the technical charts are starting to illustrate, then the Nasdaq has a long way down to go. As a result, soon it might be time to say hello to the second phase of the Bear Market – a bear so fierce, that it contains an entire bull market within it. Tonight I will illustrate these technical relationships that suggest weakness in the Nasdaq 100.

Nasdaq to S&P 500

Following is a chart dating back to mid-1999 showing the Nasdaq 100 to S&P 500 ratio. The ratio topped at the same time as the Nasdaq in March of 2000. This ratio bottomed in October of ’02 right before the general stock market bottom. It then topped concurrent with the January 2004 top and bottomed just about the time of the rally off of the August bottom. For the last 6 years, the ratio of Nasdaq 100 to S&P 500 has always topped and bottomed at similar times as the general stock market.

What is the recent data showing us? The Nasdaq 100 to S&P 500 ratio topped in early December, about 3 weeks in advance of the apparent general stock market top. The ratio has been heading decisively down ever since.

Nasdaq to JNJ

Similarly, following is a long-term chart of the Johnson & Johnson (JNJ) to the Nasdaq 100 ratio.

Johnson & Johnson has outperformed while the Nasdaq dropped. This is a trend that is intact and likely to continue. Following is a long-term chart of JNJ.

The long-term chart suggests a bullish pattern for JNJ. It appears to be breaking out of a 3 year base. In October of 2003 there was nothing but bad news for JNJ. Now it appears that JNJ is acting as a refuge for defensive money. The chart points to a good long-term strategy for JNJ: Buy JNJ when tech swoons, and buy on news of a horrible calamity. This strategy wouldn’t hold for all pharmaceutical companies such as Merck, where it would have been better to sell on the news of a horrible calamity.

Nasdaq 100 Technical Chart Contains Bearish Implications

The chart below is a 6-month daily chart of the Nasdaq 100.

There are several items that I would like to highlight. The drop off of the New Year's top has produced a fibonacci retracement of only about 32% so far. If there is not a recovery beyond this level, it would both confirm the downtrend as well as its strength. Note that the relative price strength (compared to the S&P 500) reached a low not seen since September 2004. The gap produced about 3 weeks ago was surgically filled before the Nasdaq 100 turned tail and headed down throughout the day on Wednesday. The 20-day exponential moving average was decisively broken to the downside on Wednesday. The preponderance of technical evidence is all bearish for the Nasdaq.

Looking at the full Nasdaq index, there has been a total of 9 distribution days since the New Year and this is bearish.

While the charts and rationale described above suggest bearish intermediate and perhaps long-term implications for the Nasdaq, is it time to take many bearish positions in Nasdaq stocks? It is probably still a bit early because most support levels on individual stocks and indices have held up through Wednesday evening. Here are a few examples of stocks that just “won’t crack.”

Fannie Mae, long term

Cisco 3-year

Molex Inc. (MOLXE)

Red Robin Gourmet Burgers – 6 Months

Freddie Mac

Aeropostale, Inc. (ARO)

Redwood Trust

Note: The technical chart examples presented above do not imply investment or speculation recommendations or commentary on the prospects of these companies. 

Today’s Market – Something’s Starting to Happen

Today’s stock market was a microcosm of what appears to be going on in the intermediate term – that is, defensive stocks are leading and speculative names are lagging. The Dow was up over 85 today while the more speculative Nasdaq, S&P Mid Caps, and Small Cap Russell 2000 went nowhere on heavy volume. Volume was particularly heavy in the Nasdaq, where over 2.1 billion shares were traded today. After the close, Dell computer reported results which disappointed the Street and it is trading down about 2% in after hours trading. While in the case of Dell, it appears that the drop can be absorbed within its generally bullish technical chart, the waves it produces in the Nasdaq may inflict some technical damage in other important companies. On that score, only tomorrow will know. After hours Cisco, which finished the day challenging its bearish neckline, is trading at 17.47. If the Nasdaq opens strongly negative, it could result in the cracking wide open of the important and widely traded household name - Cisco. Cisco’s bearish behavior could bring the news of the New Year’s Nasdaq swoon from Wall Street to Main Street where one phone call gets the highly leveraged John Q. Public out of the stock market. But again, perhaps I’m getting ahead of myself. On this important day in the stock market, it is notable that the Janus Funds recently reinstated the same exact advertising campaign (apparently with no significant changes) as they had in 1999. Following the bursting of the first technology bubble, and late trading scandals, this is astounding to me. I mean, it’s good for fund companies to save on expenses, but this is too much!

Freddie Mac (FRE) appeared to crack today, and this will likely be confirmed or refuted in a tradable way by the close of trading tomorrow

While from the line chart of daily closes suggests a decisive cracking, an inspection of the inter-day charts indicates that FRE traded at its present level on an inter-day basis. Again, tomorrow may know!

It appears that a significant trend break was made in the precious metals sector today. I’ll illustrate this with a 6-month candlestick chart of the Central Fund of Canada, a closed end fund trading on the AMEX, consisting of about 60 percent gold and 40 percent silver.

The chart above appears to indicate a break of the linear downtrend which began in mid October. Is this an actual trend break or a whipsaw? Tomorrow may know! If the behavior of the precious metals stocks are an indicator, we may have an intermediate trend change for the precious metals sector because the Gold Bugs Index ($HUI) was up over 7 percent in the last two trading days. On the silver side, Silver Standard (SSRI) put out a long white candlestick. Something good is going on here.

As would be expected, the opposite action in the dollar occurred.

The bond market put out a strong reversal pattern which is likely to be bearish for bond prices in the days-to-weeks timeframe. This is in the absence of negative economic data which of late tends to help the bond market.

Oil bounced today, and it may be significantly bullish, if it continues upward without touching its lower upward trend line.

Have a great evening!

Martin Goldberg

Copyright © 2005 All rights reserved. Martin F. Goldberg, MS, P.E. Market Analyst Expert Page Commentary Archive Email

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