Time to Party: like it’s 1999
By Joe Duarte on October 29, 2017
Whether you’re a bull or a bear, this market suddenly seems to have
something for you.
History is often a guide, albeit not always as exact as you’d hope,
to what the future holds. And the last time the big stocks in the Nasdaq
100 had a massive blow off it was the heady year of 1999. Led by Microsoft
and Cisco Systems, and fueled by the fear of Y2K wiping out all things
computer related, the shares of those two and other companies whose
“solutions” were meant to protect the technology universe from oblivion,
soared, especially as the year came to an end. During that period of
time paper fortunes were made. Yet as can often happen when greed is
unchecked, those investors who failed to sell in January lost most
of their gains over the ensuing three years during a nasty and grinding
Here is some perspective. The Nasdaq 100 (NDX) delivered a 102% gain
in 1999. Even more dramatic was the roughly 33% gain in NDX in the
months of November and December alone. But as often happens, what goes
up must come down, and NDX gave back 36.8, 32.7, and 37.6% of the gains
respectively over the next three years.
Flash forward to 2017 when again a handful of stocks from companies
which have the answer to today’s tech fetishes, whether social media
(FB), online shopping (AMZN), electric cars (TSLA), everything tech
(GOOGL) or movie streaming (NFLX), are leading the way higher and you
have the potential for yet another huge move in the Nasdaq 100 at the
end of the year. Of course, no two markets are the same. And, even
as the past is worth noting, if recent history is any guide, the odds
of a rally beyond anyone’s wildest imagination now are higher than
normal, as are the possibilities for every single price dip to be bought
by robotic algorithms.
So as investors, it’s not a good time to fight the general price
trend, yet. But as I will show below, there are some reasons to keep
an eye on the exits.
Big Move Straight Ahead
The most accurate indicator in this bull market, the NYSE Advance
Decline line (NYAD) is poised for a big move, with the likelihood of
the move being to the up side likely to be above average. Indeed, there
are three indicators which are pointing the way for such a move.
First, the Bollinger Bands (BB - green lines enveloping NYAD) are
constricting. This happens when volatility is dampened and is similar
to a tightening coil which is about to release its energy. Note this
tightening of the bands is occurring simultaneously to a move by the
RSI to the 50 line, which means the market’s breadth has worked off
a significant portion of the overbought state in which it has been
for the past few weeks clearing the way for an upside reversal. The
third indicator that a big move to the upside is likely is the NYAD
is near the lower BB, a major support level. This is the same occurrence
we saw in November, March, May, and August just before big moves to
the up side. Indeed, the touching of the lower band happened along
with a tightening of the B bands and NYAD touching either the 50 area
or near the 0 area on RSI, before the rally. And the bots never change
their program as long as it works.
And while the bulls have a strong argument, there is a cautionary
side to the story as the major indexes made dramatic new highs last
week, which were nowhere near being confirmed by the NYAD.
SPX and NDX Blow their Tops
The S & P 500 (SPX) and the Nasdaq 100 Indexes (NDX) both made
major new highs last week behind better than expected earnings for
key index components respectively. Yet, along with the lagging of the
NYAD (see above), the momentum indicators for SPX were mixed. For example,
while the On Balance Volume (OBV) was very bullish, the Accumulation
Distribution Line (ADI) was flat. This suggests that one group of investors
was bulling into stocks while another group was selling into the rally.
Historically, this is known as the smart money selling to the dumb
money. But since this time is different, so say the robots; this is
probably nothing to get worried about.
But just humor me anyway, as you whistle past the graveyard. In the
case of NDX both OBV and ADI were flat, signaling that aside from the
so called FANNG stocks, the companies with all the answers to the current
tech fetishes, few other stocks were seeing much action. This is even
more significant when you plug in the overall lackluster activity in
the ROC indicators for both SPX and NDX, which suggest that although
the indexes are making new highs, the advance is being fueled by heavy
buying in a select number of stocks.
Seasonality May Extend Bull Market
What I’m saying is that the bulls get the benefit of the doubt for now
but that the bears can point to some very credible technical events at
the moment. Still, September and October, the traditionally horrible
months for the market, have passed with no major declines. Therefore,
this time line sets up the potential for a very dramatic up move in November
and December, two of the best months historically for stocks.
Don’t get me wrong. I like bull markets. But this one’s been in place
for eight years, and the current rally is now almost a year long. Moreover,
although the odds favor a potentially huge rally in the short term,
which we should all participate in, what happens in late December and
beyond that is anyone’s guess. And if 2017 is anything like 1999, the
end of the year will be one heck of a party, to be followed by a very
What to do? Don’t change a thing for now. Stick with what’s working.
Buy some protection. Take some profits in big winners. And keep your
foot in the door, just in case.
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