NASDAQ is the Most Important Stock Index in the World Right Now

After a couple of weeks of fear and loathing on the stock market, the big question is whether this is the end of the bull market. And, if a bear market is about to start, just how deep and nasty will it be?

The first thing to understand is that no one knows the answer to that question. Not me, not you, not the world’s most connected central bankers.

The best you can do is weigh up the available evidence and make your plans from there. After all, we’re talking about the future. It’s pretty hard to predict.

But if you can process the data and not ruin it with your opinions and biases, you have a much better chance of being an accurate forecaster. That in turn allows you to make decisions with the benefit of foresight rather than react in hindsight.

One of my pet hates is reading headlines that say, ‘the market just crashed, here’s what to do now’.

Hang on, where were you two weeks ago, or two months ago, or at any point prior to the crash telling me to get out of stocks? Don’t tell me what to do AFTER my stocks have all splattered on the pavement!

If the author was prescient in their prior forecasts, then sure, read on. But if they’ve just popped up out of nowhere to tell you what to do when it seems a bit late for that, then hit the delete button.

Here’s what I said about 2018 in December 2017:

  1. We get a short and sharp correction early in the year as investors take advantage of the Trump tax cuts that should come into effect on 1 January. As there hasn’t been a decent correction in years, a lot of investors are sitting on solid gains. The time to sell is when the tax on capital gains is lower.
  2. The market will recover from this selloff and make new highs. Perhaps around the second quarter. That will be the high for the year.
  3. The market will lose ground in the second half of the year. The peak-to-trough decline could be up to 20%…but I don’t think we’re heading into a multi-year bear market.
  4. Take all that with a grain of salt. The chances of me being right are very low. I’m trying to point out that 2018 will likely be very different from the past few years.

That looks like a reasonable call if you look at the S&P 500 or the Dow Jones Industrials. But there are still two months of the year to go. And these are traditionally bullish months for the market. So we could see a rally recover much of the recent losses.

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Why NASDAQ is the most important index

What I didn’t say in the prediction piece is that the NASDAQ would probably be the most important index to monitor for signs that the bull market had peaked, and may turn into a bear.

Tech stocks have been the leaders in this bull market. That’s where the action is and where most of the returns have been concentrated. If the NASDAQ turns down, there is a good chance it will bring the rest of the market down too.

With that in mind, I have a few things for your consideration today. First, this news is about a month old, but it has more weight now due to subsequent events. From the Financial Review:

Is there a better sign of the times? Australia’s two richest tech entrepreneurs are now next-door neighbours and owners of the country’s two most expensive houses, after a record-breaking sale by the family of the once-dominant traditional media empire Fairfax for almost $100 million.

Atlassian co-founder Mike Cannon-Brookes, 38, and his fashion design wife Annie bought the Fairwater estate of Lady Mary Fairfax in Sydney’s exclusive harbour-front enclave of Point Piper after it was on the market for less than three weeks.

The property next door, Elaine, was until yesterday Australia’s most expensive house when it sold last year for $71 million to Mr Cannon-Brookes’ friend and Atlassian business partner, Scott Farquhar, 38. That home was owned by Sir Vincent Fairfax and later his son J.B. Fairfax.

A sign of the times, or a sign of a top?

NASDAQ’s bull run is over

Altassian is listed on the NASDAQ. It’s Australia’s most successful tech company. The article above appeared on Friday, 28 September. Altassian’s stock price peaked the very next trading day, Monday, 1 October.

As shown in the chart below, the NASDAQ peaked on 30 August. It corrected and then tried to rally again. It made a minor top on 1 October before crashing around 13% (so far).

MoneyMorning 29-10-18

Source: Optuma
[Click to open new window]

That’s a bigger decline than you saw earlier in the year. More importantly, the 50-day moving average (MA) is about to cross below the 100-day MA. That hasn’t happened since the mid-2015/early 2016 correction that saw the index fall around 20% over a seven month period.

What am I telling you?

My guess is that the NASDAQ’s bull run is over. The moving averages are in the process of turning down, which is a visual representation of a change in investor psychology.

I think you could see falls of 30–40% from peak to trough, although my guess for the S&P 500 and Dow is that the falls wouldn’t be as severe.

But there will be plenty of decent rallies along the way. We’re probably due for one soon. They will be strong enough to make you think that the worst is over. That’s the nature of bear markets.

Having said all that, make sure you read point four again (above). It’s the most important one.


Greg Canavan,
Editor, Crisis & Opportunity

PS: Tech can be a seriously lucrative market for savvy investors. If you’re looking to add a few promising biotech punts to your portfolio, don’t invest a cent until you read this free special investor report. Download it now for free.

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Fat Tail Investment Research.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

That is, investing in the Information Age means you have all the information you need at your fingertips. But how useful is this information? Much of it is noise and serves to confuse, rather than inform, investors.

And, through the process of confirmation bias, you tend to read what you already agree with. As a result, you often only think you know that you know what is going on. But, the fact is, you really don’t know. No one does. The world is far too complex to understand.

When you accept this, your newfound ignorance becomes a formidable investment weapon. That’s because you’re not a slave to your emotions and biases.

Greg puts this philosophy into action as the Editor of Crisis & Opportunity. As the name suggests, Greg sees opportunity in a crisis. To find the opportunities, he uses a process called the ‘Fusion Method’, which combines traditional valuation techniques with charting analysis.

Read correctly, a chart contains all the information you need. It contains no opinions or emotion. Combine that with traditional stock analysis and you have a robust stock-selection strategy.

With Greg’s help, you can implement a long-term wealth-building strategy into your financial planning, be better prepared for the financial challenges ahead, and stop making the basic, costly mistakes that most private investors do every time they buy a stock.

To find out more about Greg’s investing style and his financial worldview, take out a free subscription to Money Morning here.

And to discover more about Greg’s ‘ignorance is bliss’ investment strategy and the Fusion Method of investing, take out a 30-day trial to his value investing service Crisis & Opportunity here.

Official websites and financial e-letters Greg writes for:

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