BigTrends.com
Weekly Market Outlook
September 20, 2003
NASDAQ COMMENTARY
Sometimes it's good to just take a step back and look at the bigger picture. In our
case, the bigger picture is a longer-term chart of the Nasdaq Composite. The day to
day changes in momentum have been maddening for sure, but the reality is that we've
seen a lot more up days than down days for a few months now. Since "the trend is your
friend", we'll have to assume that the general bullishness will continue until we
have a reason to think otherwise.
As we mentioned in the Mid Week Update, the support line (dashed) from March's low
has been miraculous. We dipped under it once in August, but recovered by the end of
that month, and we still find ourselves well above it. In fact, the Nasdaq is about
40 points (2%) above it right now, so there's a little bit of room for a pullback
before we'd get really nervous. In addition, we continue to make new multi-month
highs. When investors push stocks into relatively unfamiliar territory, we take it as
an indication of buying confidence, which in turn means the buying is likely to
continue.
On the flipside, we have to face the reality about stocks. They're simply overbought.
And the Nasdaq is already up over 40% for the year. That would be great if companies
became 40% more valuable this year, but they didn't as earnings gains have not kept
up. Valuations (forward looking P/Es) are still pretty high, and investors are going
to realize this sooner or later. Generally speaking, September and October are likely
to be the months in which these investors do something about the inflated prices.
This is especially true for the Nasdaq. In fact the Nasdaq is the only major index
that, historically on average, loses ground in both September and October.
We're also contending with resistance around 1910. Although we topped out on Thursday
with a high of 1910 and Friday with a high around 1913 (both of which were
multi-month highs). You may recall that the market has a way of using big round
numbers as support and resistance, so we'll mark our next resistance level
accordingly; we'll just set our bar here at 1910. We closed Friday at 1905, so it
wouldn't take much to break to new highs on Monday again.
So what's the overall assessment? We're sticking with the trend here and remaining
mildly bullish, although we do concede that are more and more reasons to turn
bearish. Between seasonal weakness and being overbought, it's likely that the bull
run is near the end of its life. So don't expect this strength to last a whole lot
longer, but enjoy it while it lasts.
NASDAQ COMPOSITE CHART
S&P 500 COMMENTARY
The overall trend is still a bullish one for the S&P 500 too, although it's been a
choppy ride. The index continues to break to new highs, and makes higher lows in the
process. Generally speaking though, the S&P 500 is doing a good job of not giving up
ground it has recently gained. For example, take a look at the 1030 resistance level.
We had to swing at that level four times before actually breaking above it last
Thursday, but now that we have, we're finding support there (see Friday's bar).
That's bullish.
Stochastics indicates that we're again in an overbought situation - the third time
we've had this problem in the last month. Each time we enter the 80+ overbought
threshold we do indeed get a slight pullback, but then end up recovering to go even
higher. In other words, investors are assuming that the rise will continue and they
keep buying stocks - fueling the very bullishness they are counting on. They may be
right too, but it's unlikely this rally will last forever.
As we've been saying recently, we're due for a pullback, and not just because we're
overbought. We're heading into the weakest time of year, and with markets already
over-extended, a correction of some sort is likely to be in the cards. As for what
would actually signal such a decline, go back to your 20 day EMA (exponential moving
average) line (in blue) and our previous support and resistance levels. A fall under
the 10 day EMA line (red, currently at 1026) wouldn't be a major blow, but a close
under the 20 day EMA (blue) would likely be a sign of worse things to come. The 1015
and 965 levels are still important potential landing points too.
As for the timing of such a decline, we may see it get pushed back into October. The
momentum is still strong and we're expecting a few more days of upside here -
possibly even through the end of the month. But we're pushing our luck, and with each
big gain, we get a few more investors who start getting an itch to take profits.
Statistically, the odds are in favor of the index taking a loss in September or
October. In the meantime, the bulls have the edge.
S&P 500 CHART
BOTTOM LINE
The trend remained strong last week, largely fueled by a great number of positive
economic announcements. The coming week is very light in terms of economic data, so
don't look for the same kind of sparks in the market. The momentum remains bullish as
all of the indexes continue to venture up to levels we haven't seen in over a year.
We have to assume that we'll keep getting that same kind of increase - at least until
we have clear evidence to think otherwise.
The other thing to be aware of is that Friday was an option expiration day
(triple-witching, in fact). These expiration days and the days leading up to them
aren't necessarily a true indication of the market's tone, since there is some buying
and selling pressure stemming from option activity. Early next week we'll see a more
accurate picture of what investors are thinking.
Have a Great Trading Week Ahead!
Price Headley, CFA, CMT, President
With James Brumley, Research Analyst
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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