Happy Belated Anniversary! Wondering what for? Here, let me try to help you remember, but please don’t get mad at me. I’m only the messenger. It was just over five years ago, on March 10, 2000, that tech-crazed speculators and vastly irrational market psychology drove the NASDAQ to its historical and insidious high of 5132.52. Remember now? Sorry about that.
I still recall watching CNBC — the leading Street cheerleader at the time. Highly regarded analysts with so-called Streetwise forecasting skills were predicting a technological revolution in the new millennium, where technological advances would free people from work to enjoy more leisure time. Ok. It’s five years later. I’m still working hard, and I have even less time for leisure than I did five years ago!
So, how are you feeling? Imagine, the once-mighty NASDAQ was trading at above 5000. These days, we get excited when the NASDAQ breaks 2000, as it did this past Tuesday. The media is calling it a “technical breakthrough.” But wait, it is only a mere break and way too premature to call it a developing trend. In my view, there is more excitement watching “Fear Factor.”
Here is my case of why you should hold back on the partying. The NASDAQ broke 2000 on April 12 and could not hold. The same happened on March 21. I would only get excited and jump on the euphoric bandwagon should the NASDAQ trend higher and break key technical resistance at 2100 on rising volume. I surely do not want to be on a runaway bandwagon and fall hard, like many people did five years ago. Just take a glance at your 401K, if you’re brave enough.
As I implied, the buying volume that you need for any sustainable rally is not there. In this week’s break above 2000, only about 1.56 billion shares exchanged hands on the NASDAQ, well below its five-day moving average of 1.69 billion shares and its 200-day moving average of 1.76 billion shares. What this implies is the apprehension in the mass market — a bearish divergence, in other words. I will talk more about this in my column this Friday. You’ll find it interesting. Now, let’s play with the numbers. The NASDAQ is still down 61% from its all-time inflated high. The historical annual return for stocks is about 8%. But as we are all aware, today’s market does not follow historical trends. The current market climate could see indices jump 8% in a matter of a few months. Case in point: in 2003, the NASDAQ surged 50.01% and closed at 2003.37. Now we just broke 2000, and it is nearly 17 months later! In other words, don’t become irrational and start buying everything just because the NASDAQ broke 2000. It’s really not a big deal.
A final thought for today. Let’s assume the NASDAQ returns 10% annually. At this rate, it would not be until late 2014, just over nine years from now, that the NASDAQ would once again trade at its historical high. That would equate to about 15 years between the two highs! And this assumes a very long-term bull market. For investors in 2000, that is lot of time to break even.