By Mark DeCambre, MarketWatch
Wall Street stocks are winning. But investors don’t appear to be hitting a decisive exhaustion point, with the Nasdaq Composite Index mounting so steady and an ascent into the stratosphere that Nasdaq 6,000 is legitimately on the table.
“The Nasdaq has not seen a major new high, which is to say a breakthrough of a big round number, since way back in 2000,” said Brad McMillan, chief investment officer at Commonwealth Financial Network. He said “we are getting very close to the next one, at 6,000.”
How significant is that? Maybe not at all, but the Street adores symbolic levels.
“We tend to get attracted to big round numbers,” said Michael Antonelli, trader at R.W. Baird & Co. Of the attempt at the 6,000 level, he said it may be sneaking up on market participants: “I don’t want to say it’s euphoria, but perspective is being lost because we hit new numbers every day, but the fact that the Nasdaq is approaching 6,000…I think people will look around and go ‘Holy, cow! We actually are looking at 6,000.’”
Indeed, the Nasdaq Composite /quotes/zigman/12633936/realtime COMP +0.38% on Wednesday traded at an all-time intraday high at 5,905, up 1.3%. The Dow /quotes/zigman/627449/realtime DJIA -0.20% was trading above 21,000 and the S&P 500 index /quotes/zigman/3870025/realtime SPX +0.11% also was trading sharply higher a day after President Donald Trump delivered a State of the Union-style address in front of Congress late-Tuesday, which some investors attributed with underpinning the rally and reinforcing hope that the president can implement market-favorable business polices and tax-reform. That and a rosier outlook for the global economy have combined to lift equities decisively higher.
Although many on Wall Street fret about lofty valuations in light of a lack of specificity around Trump’s legislative agenda, some continue to make the case for further climbs for the Nasdaq.
It’s different this time
The last time the Nasdaq was somersaulting higher was in the late 1990s and early 2000s, during the notorious dot-com bubble. That period of buzzy tech companies with dubious business models, exemplified by Pets.com, didn’t end well for investors. In fact, Wall Street took 15 years to recover, with the index not returning to the 5,000 level again until March 2015.
But some say it’s different this time. Ryan Detrick, senior market strategist at LPL Financial, says the Nasdaq is more diverse, with fewer volatile tech stocks, and perhaps more stable. “Tech stocks don’t make up nearly as much of the Nasdaq as they once did. Incredibly, tech is less than half of the Nasdaq today. This could be a positive sign, as this influential group isn’t seeing the type of love it did 18 years ago, and the Nasdaq isn’t so top heavy in one group,” he wrote in a Feb. 15 research note (see chart below):
We’re just getting started
Looking at the Dow Jones Technology Index /quotes/zigman/627462/realtime XX:DJUSTC +0.29% , another popular gauge of tech-sector performance, Detrick argues that tech, which has only recently marked a recovery, has more pent-up potential. This is a similar argument made for the banking sector, which had been in the doldrums since the 2008-09 financial crisis brought the sector to its knees. In other words, although we have seen a healthy move for the sector, it can still go higher because it is comparatively not as rich as similar moves in other sectors, and it has more latent energy to carry it to new heights. The chart below attempts to show that a longer trend around a base, or lower level, the sharper its move higher, or breakout:
Winning begets winning
Meanwhile, data from Bespoke Investment Group shows that there have been few trading streaks like the one the Nasdaq has enjoyed recently. Bespoke’s research also indicates that the current moderate pace of the seven-session climb for the Nasdaq usually translates into strong future returns (see table below).
Source: Bespoke Investment Group
Commonwealth’s McMillan added that the market may still be capable of higher highs. “With valuations high, but still well below the peak of the tech bubble, there may well be enough room to get it there as earnings and sentiment both improve,” he said, referring to corporate earnings and investor sentiment.
To be sure, broad concerns about bubbly valuations and worries that geopolitical or domestic problems could whack markets back down remain persistent. But the eerily low level of the CBOE Volatility Index /quotes/zigman/2766221/delayed VIX +0.79% , sometimes known as the fear gauge, implies that investors aren’t too frightful.
Investor takeaway : But of course, complacent markets mean that smart investors should be cautious while keeping their eyes on records.
—This article was originally published Feb. 15