NASDAQ 100 Nears Post-Dot.Com Bubble High

While yesterday’s headlines focused on some of the major indices closing at 2-year highs, there’s another, the NASDAQ 100 is on the brink of a far more significant threshold.  Don’t blink now, but at yesterday’s high, the NASDAQ 100 came within 2.1% of the 2007 high for the index.  At yesterday’s closing price of 2,187, the index settled  just 2.3% away from the 2007 high.  Let’s look at the monthly chart for a second:

The NASDAQ nears 2007 highs.

If you’ll remember, in 2007 the Dow and S&P 500 made all-time highs, breaching their Y2k peaks, while the NASDAQ failed to significantly recoup much of its post losses.  Meanwhile, today the S&P 500 and Dow still remain quite a bit away from their 2007 highs (for example, at yesterday’s close the S&P finished 29% away from the 2007 all-time high).  Please note that the broader NASDAQ Composite index is 7% away from those same 2007 highs–a little farther than the NASDAQ 100, but far closer than either the S&P or Dow.

Does this mean anything in the short-run?

In the short-run, with the indices having traveled a long-way over the recent months, this would be a reasonable spot for some digestion in equities.  That doesn’t mean that a pullback will lead to a substantial drop, nor does it mean that we will actually get much of a down-move altogether.  What it does mean is that at some point in the near future, either time to digest, or a controlled down move could be in order.  And that would be healthy!

People like calling tops and bottoms, but that’s missing the point altogether.  Too many forget that not every top is “the” top, nor bottom “the” bottom.  What’s important is to identify some key inflection points and just manage risk/reward accordingly.  It most certainly doesn’t mean sell everything and run.  For those who want to add exposure to stocks it’s a great opportunity to identify your favorite investments (they could be stocks you already own that you’d like to add to, or could be new stocks altogether) and find some strategic price and valuation levels at which you would like to get involved.

When the NASDAQ can overtake the 2007 highs, the chart has a huge vacuum above the 2200 level in which to move higher unobstructed by any horizontal chart resistance.  This chart indicates that we could be on the brink of another major drive of capital into our innovative sector of the economy.

Is there something bigger to understand here?

The long-term meaning of the NASDAQ action is far more significant.  Two of my earliest articles on the Wall St. Cheat Sheet had the following titles: “Why Tech Stocks are Regaining Their Mojo” and “Can the Market Rally Without the Financials?”  This is exactly what’s happening right now.  Both the Dow and S&P have far more financial exposure than the NASDAQ and this both explains the relatively weak performance since 2007 in this indices and the more lackluster bounce back since the ’09 bottom.

The crisis started with a panic in the financial sector and spread to the broader economy.  As we all now know, the economy and the financial sector in specific have yet to fully recover the extent of the damage from the credit bubble popping.  But, the amazing part of it all is that despite all the woes everywhere else in the economy our innovative sector kept innovating and started thriving once again.  The NASDAQ as our technology intensive index clearly highlights this trend.  These last few months we received a resounding “yes” to the question of whether the market can rally without the financials.

Many still think that the market can’t continue higher without some participation from the financials, and sure, at some point in the future that’s a valid statement.  That doesn’t mean we’re there yet.  For a healthy economic future in this country we need a far more balanced financial sector that’s not nearly as subject to volatile expansions and contractions.  This allows the real growth areas of our economy (mainly innovation) the opportunity to do its thing without the impediment of stormy asset cycles.

One thing we all need to remember is that whether stocks go up or down, engineers are engineering, scientists are researching and programmers are programming.  While everyone likes seeing an up stock market, people who have jobs continue to do their jobs regardless of which way the market moves.  This goes the other way too–the stock market can go up more than GDP has recovered.  On the one hand, we have our economy, on the other, we have our stock market, and although the market is generally a reflection of the economy, the two don’t move completely in tow with one another.

The strength in the NASDAQ highlights that this recovery so far is technology driven.  Companies are cutting their expanses and expanding their margins, not only by cutting jobs, but also by embracing new, cutting edge technologies which change the way business is done.  This is a real value additive for our economy.  In many respects, the argument can be made that we’re only at the beginning of another wave of rapid technological advancement in a transformative fashion that will have a major impact on everyone’s quality of life.