Two questions Nasdaq investors are asking: What the heck is going on? What does it portend?
This week’s slide in the Nasdaq composite index, like last week’s roller-coaster sessions, erupted at a time of low inflation and strong consumer optimism and economic growth. No international financial crises darken the scene. Analysts forecast generally robust corporate earnings growth this year.
After the close of trading Wednesday, for example, semiconductor-maker Advanced Micro Devices, listed on the New York Stock Exchange, posted quarterly earnings per share double Wall Street’s consensus estimate.
AMD’s share price immediately jumped from a $5.06 loss in Wednesday’s NYSE session to a $5.37 gain, to $76, in after-hours electronic trading.
Such stock market volatility has become the norm, as technology makes it easier and cheaper to trade and the Internet broadens the base of active investors.
The Nasdaq composite index, which has become the barometer of the so-called new economy, stands 45 percent higher than it did on April 12, 1999.
For all the talk about margin calls to cover losses, most Nasdaq investors are sitting on substantial winnings and still playing, in effect, with house money.
On the other hand, the Nasdaq index has surrendered roughly half of its 52-week range from its intraday low of 2330 on April 20, 1999, to the intraday high of 5132 on March 10.
Giving up half of a 120 percent gain over the course of a year is hardly Armageddon for Nasdaq investors, but it’s no fun, either.
Analysts find nothing in the news or economic trends to explain what appears to be a rapid and broad flight from Nasdaq technology stocks.
Nor do economists see any near-term impact on the U.S. economy from the Nasdaq slide so far.
But technical market analysts, the folks who detect investor behavior patterns in time-series charts of stock data, are having a field day.
Gregory Nie, technical analyst for First Union Securities in Chicago, said the current chart pattern for Nasdaq looks “vulnerable.”
An early warning came in March, when the Nasdaq reached an all-time high, fell sharply, then recovered, all within the month. The late-March rebound failed to top the peak set earlier in the month, a sign of technical trouble.
Next, the market’s failure this week to sustain last week’s mini-rally spelled trouble, Nie said. At last Friday’s close, Nasdaq had climbed 22 percent, to 4446, from the intraday low of 3649 on the previous Tuesday.
Nasdaq on Friday closed at its high for the day, a bullish sign. The index broke above Friday’s close briefly Monday, but quickly began a nail-biting slide that extended through Wednesday’s close.
Every technical elf is watching to see whether the Nasdaq index, standing at 3769.63 at Wednesday’s close, can hold above the April 4 intraday low of 3649.11.
If not, the next technical floor is the index’s 200-day moving average of about 3500, a level not seen since December, Nie said.
The bigger problem, he said, is that the current rotation between Nasdaq tech stocks and NYSE basic-industry, financial and consumer-product stocks has become “vicious,” signaling market exhaustion.
“There’s an awful lot of motion, but we’re no longer making any headway,” he said. “The firepower to move the market higher is diminishing.”
The good news, based on the modest trading volume, is that Nasdaq investors are not throwing in the towel en masse. Investment advisers report a wait-and-see attitude.
In recent days, amid the turmoil, share volume on the Nasdaq and NYSE has been below the average daily volume for the year.
But a wrenching capitulation, with extraordinarily high share volume, is often the only way to end a market slide.
More selling of Nasdaq companies, accompanied by Nasdaq daily trading volumes well above 2 billion shares, could do fundamental as well as technical damage to Nasdaq stocks and the broad market.
Initial public offerings, which have provided considerable juice to trading in recent months, likely would dry up. Fledgling Nasdaq companies, trying to grow without earnings or even revenues, would find the window shut for a second round of equity financing.
Stock options, paid as compensation to high-tech workers, would become a poor substitute for cash. Investor sentiment could turn sour toward stocks generally, curbing the persistent buy-on-dips optimism that has characterized investor behavior for many years.
Nie does not believe such a point has been reached. The notion that the longest bull market in history has been crippled will not take hold unless the current pattern persists through the rest of the second quarter–nearly three months, he said.
Three months is an eternity at a time when market moods have been compressed to increments of days, or even hours. First-quarter corporate earnings reports, widely expected to bolster investor confidence, have only begun to appear.
“Trading volume is light,” Nie said. “Keep your chin up.”
