Is the Nasdaq Forecasting Higher Prices for Stocks?

Sep 26, 2007: 11:26 AM CST

The recent moves and recoveries in some key NASDAQ stocks have been nothing less than stellar over the last month. Typically, when technology stocks outperform (or lead) the market, this has been a good sign for both the Dow and the S&P in the near future, as investors raise technology stocks when they perceive improving/better economic conditions in the future.

First, let’s compare the Nasdaq (Tech Weighted) to the Dow (Stable, Blue Chips):

Price is less than 25 points away from a multi-year high. Price is also making new momentum highs.

Now the Dow:

Price is currently 150 points away from its all-time high, and price is also making new momentum highs.

Now, let us compare the relative strength of the QQQQ (Nasdaq ETF) to the DIA (Dow Jones ETF):

The QQQQ ETF has been outperforming the DIA on a relative strength basis, and the ratio has made a new relative high.

The following chart shows the Nasdaq price leading turns in the Dow (and Nasdaq) price:

We see that at least three times previously, the compared price of the Nasdaq led the Dow in forecasting turning points.

Currently, the Nasdaq is exhibiting greater relative strength over the Dow, which tends to be a good sign for the overall market.

If we look deeper, we can see why this might be the case:

Euphoric Run in Google:

Euphoric Run in Apple (APPL):

We see investors surging into these two major stocks, which has added positive values to the NASDAQ index as a whole. Both Google and Apple are making new lifetime highs.

New price highs are not far away from IBM and Intel (INTC) as well, meaning that some of the major components of the NASDAQ are either making new all-time price highs, or just steps away from them.

And if the theory that investors bid technology stocks up when they are forecasting a better/more stable market (and higher index prices), then this can only be a good thing for the stock market as a whole.

Also, refer to a recent post by Dr. Brett Steenbarger, who asks the question (and provides information) “Why Are Stocks NOT Forecasting Recession?

As a reminder, the only arbiter in the market is price – not the ‘talking heads’ on the TV or any other ‘gloom and doom’ forecaster. Follow price.

 

2 Comments

2 Responses to “Is the Nasdaq Forecasting Higher Prices for Stocks?”

  1. Jonathan Says:

    Good reminder. I’m battling my right now. It is saying “this market action is all wrong”. I just think the economy is not as healthy as the stock market would indicate with the high price of oil. Thankfully, what I feel doesn’t matter 🙂

  2. Corey Rosenbloom Says:

    I’m with you. It’s difficult to listen to the news and think “what we think should happen” and perhaps try to short the market or at least be ‘on the sidelines’ waiting for the crash and then watch price creep (or surge) higher. Eventually, one of us has to surrender – the market, or the trader. In my experience, traders do best to surrender to the market, because I’ve rarely if ever seen a market surrender to a trader 🙂

    Oil has been coming off its highs, but it has made new lifetime highs this week. Higher prices will (usually) be a drag on the consumer, and a bane on the overall economy.