The NASDAQ composite index gained 38 points to close at 4239 on Thursday, which is a new high for the index. After starting the day a 4170, down 25 point the intraday move showed the strength of the index currently. What has changed since February 3rd? Has the economy shifted to hyper growth? Where earnings that much better than expected? Have the emerging markets worries all been resolved? Evidently someone screamed the all clear signal and the buyers set out to put money to work and the index rallied back to the previous high and beyond. The chart below of the NASDAQ index shows the picture perfect ‘V’ bottom.
The next challenge for the index is to clear the intraday high at 4243 and resume the previous uptrend. This is where the questions will come relative to the strength of the index and what leadership is in place to continue the move? We can start with the NASDAQ 100 index Which closed at 3658 and did hit a new high above the January mark of 3634. As we like to do, this a good place to start looking at the current leadership. The large cap stocks are now providing the necessary leadership on the upside. A quick scan of which stocks are leading the index higher is simple enough to review for ongoing opportunities.
The last six days the leaders by percentage return are GMRC up 49.3% on news of deal with Coke catapulted the stock higher. SHLD up 26.40% news of large position taken by Force Capital Management pushed the stocks higher. AKAM up 25.9% on news of an upgrade and fund raise. EXPE up 19.9% on earnings beat. ATVI up 17.1% on earnings beat and outlook. ALXN, REGN, TSLA, PCLN, ORLY, BIDU, AMAT, CERN, XLNX were all up double digits during this same period. It is easy enough to scan the 100 stocks that make up the index and find the best trading patterns or fundamental stories looking forward. If the trend is going to continue on the upside finding the leaders is the key to outperforming looking forward.
Scanning the sectors for leadership the first that jumps out is the biotechnology sector (IBB). The move of better than 10% off the lows accelerated following the breakout from double pattern setup off the test of support near the $234 level. At least half of the move would have been realized on the breakout entry point. Finding the leadership on the turns is key. That is why we track the pivot points and then look for the points and catalyst that will create positive opportunity. As we know, not all trades work out perfectly, but for the most part they do have higher probability of success. Medical Devices (IHI), Pharmaceuticals (IHE), Technology (IYW), Semiconductors (SOXX), Internet (FDN) and Networking (IGN) are providing the leadership in the broad index.
As with any market transition you have to confirm the trend and the timeline you are watching. When the top reversed on January 22nd the question was, would it develop into a trend? From a micro-trend view the answer was yes as over the next two weeks the market worked lower. However, on January 30th the market created a potential pivot point as it bounced of the low. Two days following, the downside resumed until February the 4th established another potential pivot point. That one worked and is still in play on the upside creating a micro-trend on the upside. We start looking at the micro-trend and the let them expand in time as long as the trend line remains intact. Thus, the current bounce of the low can be interpreted many different ways depending on the timeline and strategy that is creating your perspective. For that reason we continue to discuss and teach that you have to know what your strategy is and what direction you want to go in response to the markets action.
Managing money is all about risk management relative to you as the investor, and the time horizon you want to focus on with your money. Don’t get caught up in the hype of the moves, focus on the direction/trend, the timeline you want to hold the assets and the risk you are willing to accept within those parameters. Then find the leadership and dig as far as you would like to go relative owning the major index, the sectors, the sub-sectors or the stocks. Focused strategies are what work, a random approach based on emotions will end poorly.
Next phase of this move is to clear the January highs and for buyers to remain engaged in the process going forward.