Friday, July 13, 2007

The Nasdaq still has room to run (Stock Chart, July 12, 2007)

The US market rallied today, with the S&P gaining 28.94 points (1.91%) and the Nasdaq rallied 49.94 points (1.88%). The S&P 500 is now at all time highs, and the Nasdaq has reached a multiyear high (still below the Bubble highs from 2000).

Looking at the chart, the different indices have broken out, with Nasdaq performing very well.

In the main window, we have the three year performance of the Nasdaq ($COMPQ). In the top window, we have the ratio between the Nasdaq Index (currently at 2701.73) and the S&P 500 index (currently 1547.70). When the $COMPQ:$SPX ratio is high, that means that the Nasdaq is outperforming. When the $COMPQ:$SPX is low, that means the Nasdaq is underperforming.

This number is best used as a contrarian indicator. When the Nasdaq has outperformed too much, then the Nasdaq is at a top. When the Nasdaq has underperformed too much, then the Nasdaq is at a bottom.

In the last three years, the best time to buy the $COMPQ is when the ratio between Nasdaq and S&P 500 is around 1.65. The best time to sell, according to the charts, would be when the Nasdaq to S&P 500 ratio goes above 1.8. These ranges nicely coincide with the tops and bottoms.

Looking at todays situation, we see that the Nasdaq has broken out to new multiyear highs, and that the Nasdaq is outperforming the S&P 500. Trends tend to continue (what was resistance before is now support), and the ratio between the Nasdaq and S&P 500 is only 1.75. According to all this, there's still room to run!

If you invest in ETFs, the QLD (double the Nasdaq 100 ETF) might be a possibility. Also, since the Nasdaq is outperforming the S&P 500, Nasdaq stocks and tech stocks might be good upside plays.

Today's Chart

Follow today's chart of the Nasdaq using, courtesy of
Nasdaq Three Year Chart

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