NASDAQ: The Market Melt-Up Continues

Following some AM woes composed of Greek debt and static unemployment data, the NASDAQ Composite, along with the rest of the major indices, looked like it was headed for a second straight day in the red.  To some, sullen futures before the bell were ready to mark the beginning of the correction that so many see coming, but that so few will accurately predict.  Forty-five minutes into the day I was sure they were right, and an hour in I nearly closed up my Longs.  But if this post-March ’09 bull market has been anything, it has been resilient.  Resilient enough to knock out shorts almost every time they dared show their faces.  Like clockwork, by the time my lunch arrived (turkey sandwich, because I’m a trail-blazer), the major indices had turned a welcome shade of green and would remain so throughout the rest of the trading session.

Thursday allowed many of the bulls out there to breathe a sigh of relief, but sentiment on the Street definitely appears to be weakening.  This sentiment can be heard via pundits, but also through volume, the collective voice of institutions.  The NASDAQ has suffered several high-volume down-days over the past few weeks, and while each one on its own cannot do very much to derail the up-trend, a bunch of them in a relatively brief span of time can knock down even the sturdiest of opponents.  It’s Rocky IV, borne out on the tape.

To gain some insight, we might look to the brief correction that began in late-January.  On the chart below, you’ll see a box encompassing the approx. 10 days leading into that correction.  Then, after taking the escalator up for a week-plus, the NASDAQ began to level out.  During this period of consolidation, the trading activity was very bearish.  Five out of the ten days were down on high volume, three coming on higher volume than the day before.  If you were tuning in at the time, you would have noticed closet bears “coming out,” as it were, much in the way you are beginning to see this now.  A day after the boxed-in period ended, we had another big down-day, followed by two consecutive down-days in the highest volume the index had seen in at least a month.  And thus, we had the beginning of our “correction.”

Now it’s on us to take account of how much today’s market bears resemblance to late-Jan’s so as to hopefully be closing our Longs and opening up our Shorts (there’s gotta be a better way to say that…) as the next correction, however mini it may be, begins.

For starters, there are some similarities in the March 5th-March 22nd trading period and the period that led into the stabilization preceding the January correction.  The period was made up almost exclusively of up-days and led to a period of churning.  But that, in a way, is very much what we would like to see from our markets.  Never-ending escalators up seem to inevitably lead to escalators down, often at double the speed.  It’s the nature of the churning that counts, not the form.

As I mentioned above, we’ve seen three high-volume down-days over the past few weeks.  This is certainly a sign of some institutional selling, but it is not quite enough to bring out the chicken little that resides somewhere within each and every one of us.  I would recommend maintaining your Longs but perhaps beginning to hedge some positions.  The chatter of correction is on the rise, and these things often become self-fulfilling prophecies.  Indeed, S&P came out today and upgraded themselves, offering a 1270 price target, but only after a correction comes first.  And if S&P is getting into the correction game, you know the story’s been getting around.

For now, you should be okay keeping your Longs open, mostly because the coming earnings season should still be chock-full of earnings inflated by monetary stimulus, etc.  But be on the lookout for these high-volume down-days we’ve been seeing.  Once they pile up, we’ll know it’s time to get on the other side of the trade.

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