Nasdaq’s recent weakness signifies an important change in
market leadership that seldom happens without a strong reversal of overall
market direction as the market seeks new leaders. Nasdaq has now declined 7.3% since its peak
on March 6th while the S&P 500 is off 3.4% since its high on
April 4th. Moreover, the key
momentum stocks responsible for most of the previous strength in Nasdaq are
down much more. Since their respective
peaks Three D Systems is down 51%; FireEye 49%; Splunk 45%; Yelp 37%; Tableau
software 35%; Pandora 35%; and Workday 35%.
Others such as Tesla, Netflix, Facebook, Biogen and Gilead are also off
significantly. All of these stocks
either have no earnings or are selling at extremely high price/earnings
multiples. This is reminiscent of March
2000 when the dot-com bubble started to burst amid widespread investor denial
that the bull market could come to an end.
The probable change in leadership is also accompanied by
other indications that the long cyclical bull market may have ended. The number of new daily highs in the market
has diminished on each successive rally.
Margin debt is at record highs, both on an absolute basis and relative
to GDP. According to the Investor’s
Intelligence Survey, bearish sentiment is at the lowest level since 1987. Adding to the malaise, this is happening at a
time when the Fed has begun to pull back from its Quantitative Easing policy
that has boosted stocks in the last few years although the economy is still
staggering along at a tepid pace of growth.
Yesterday (Wednesday) the market overreacted on the
upside to the release of the Fed minutes of the March meeting on the grounds
that the FOMC appeared more dovish than originally thought. [More]