NASDAQ & Market Update 3.1.2007

This is a brief update to our NASDAQ and stock index sell signals from February 13th, 2007.  At the time, we were expecting lower prices based on valuations, draining market liquidity, and a rare technical false breakout pattern...but not a single day event.

In summary, even though the NASDAQ market traded dramatically lower on Tuesday 2.27.2007, the 2400 level on the composite index--our vacuum point-- has still not been breached on a closing weekly basis.  While this is good news for the bulls, the bad news is that the S&P 500 did breach lower level support, and just as promised, the heartless silicon machines kicked in and the market traded down as though vacuumed through a parallel universe vortex. 

The media has their version of the twisted story that we covered, but suffice it to say that program trading curbs do not actually prohibit program trading, just arbitrage between the futures and cash markets.  An institution could freely dump baskets of stocks and even short equities, per the NYSE rules that we also captured in our research note.

Where Do We Go From Here?

The most likely scenario suggests that the market will test the recent spike lows, which are roughly 1.5% and 2% lower for the DOW and NASDAQ, respectively.  This is what markets typically do when working off excesses which is the best case scenario, or beginning a new down leg, the bear case. We engage a long term view of the capital markets, and hence lean strongly towards the bear case.

Technical View

The weekly charts of the NASDAQ and S&P500 below reveal only modestly bearish price action from the big picture.  However, the momentum and potential support level breaches illustrate a new bear market phase in the making. 

The 2300 level in the NASDAQ and 1325 area in the S&P 500, marked with red lines, should offer some buying interest.  Given the fundamentals, and less than hostile interest rate environment, we do not foresee a severe bear market developing, measured by a 30% or more decline in the major indexes. 

Some Good News

Sentiment and fear are growing ugly, which is good, but still has a ways to go.  Moreover, several quality stocks are beginning to show up as potential buys on both our technical models with WatlooSoft©, and fundamental models utilizing the Lupo- Kioutas© model.  So readers should expect to see a slow reversal of the past few weeks where we had mostly sells (75%) over buys.  Our master portfolio remains well positioned in the current envirnment.

Earlier High Risk Warning

We make market order out of market chaos.©

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