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NASDAQ Hits a Record After 15 Years

nasdaq-20-year

Today is big day in the markets – its taken the NASDAQ 15 years to return to the 5,000 level that it reached at the pinnacle of the Dot Com mania of the late 90’s. Back then, investors were willing to throw money at just about anything that planned to use the internet as a delivery platform – Pets.Com is the classic example of a multi-billion dollar company that was not much more than an idea, but investors threw so much money at it that it was valued higher than many established industrial companies that had actual products to sell and cash flow for operations.

Today, we complain that valuations are high (for example, Facebook at 71 P/E, Under Armour at 81 P/E, or Celgene at 50 P/E), but these are small potatoes by comparison to the mania pricing of 15 years ago. The big differential between then and now is that the companies with high valuations in general have real businesses that generate earnings. Investors can see where these earnings are going in the future and are willing to pay premium valuations today for the promise of high earnings in a few years.

All over the business news today, there is a debate about whether we are in another Tech bubble. That seems silly to me – yes, P/E’s are high, but so are earnings growth rates. I think a more salient issue is whether we are at a cyclical peak and due for a bit of a pullback. Check out the graph below:

nasdaq-comp-annotated

I have circled several of the indicators that are flashing warning signs that the index has moved too high too fast. Does that mean it will definitely go down? For long time readers of the blog, you know that these over bought readings can be cured by either a fall in price OR by a movement sideways in price and the passing of time. Either is as likely as the other.

But the one thing I do want to point out to you is the red arrow I’ve drawn on the price graph. You can see that the index is having trouble breaking through the blue line which is acting as resistance. This blue line is the 10% band above the 200-day moving average. We haven’t discussed that band in a few months, but it is an important level for any stock or index. Indexes particularly have a difficult time trading at that level – much of the time, it represents a near-term top in the price of the index and it represents a level where you want to be a seller more than a buyer – in other words, it is a high risk area of the market.

Will it be the top this time? No one knows. If you are a gamblin’ man you might bet that the amount of money sloshing around the economy due to artificially low interest rates and money printed through the Federal Reserve’s Quantitative Easing program (as well as those of Japan and Europe) will keep the party going. However, in my opinion, it is better to be safe and cautious than wildly bullish at this level. Chances are good that we will see a bit of a pullback that will cure the over bought indicators and allow the index to pull back from the 10% band.

At least that is what I am looking for at this time.

Mark