The Nasdaq's Troops Are Faltering

 | Oct 27, 2013 | 6:30 PM EDT
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I realize I have spent an inordinate amount of time fussing over the Nasdaq -- but, as a slave to my statistics, I cannot get this index's behavior out of my head. I'll sum up its performance last week by sharing with you what is now a very glaring divergence.

The Nasdaq gained almost 1% on the week, or about 30 points. Yet, if we add up volume minus down volume for that period, we find a net negative of 1 billion shares. C'mon folks -- this is not how a healthy market shows up statistics-wise. In fact, I ask you to go back to my columns in April, May and June, when I often highlighted inverse stats in the Nasdaq -- that is, net volume was quite positive, even as the Nasdaq was either red or flattish. As we know, the index proceeded to take off as the market leader this summer and into autumn.

Keep in mind that, after the taper-tantrum in May and early June (i.e., the market fretting over the Fed's potential to taper stimulus), the market did not bottom until late June. It took that long, therefore, before the outperformance of the Nasdaq showed up in such a way that no one could miss it.

I keep staring at this chart of the Nasdaq McClellan Summation Index, which uses volume, and nowhere on this chart can I find another time when the Nasdaq has rallied 7% in a straight line. Yet not only has this indicator failed to participate, but it has pushed downward the entire time.

That is quite a divergence. There have been times when it's taken a little while for this indicator to push upward, but eventually it would do so. As of this morning, it will take a net positive differential of 1 billion shares in order for this indicator to stop going down -- and, obviously, even more for it to turn back upward.

Consider that Google (GOOG), Amazon (AMZN), Microsoft (MSFT) and Priceline (PCLN) have all soared, along with several other major Nasdaq stocks. Even Apple (AAPL) has joined those names in the green, although it hasn't soared. Maybe the company's upcoming earnings release, due Monday night, can save the Nasdaq's chart.

However, I think these divergences have more to do with the Nasdaq's biotech stocks.

Biotechs had been on fire to start the year -- look the rise in the iShares Nasdaq Biotechnology Index (IBB) relative to Nasdaq through May, as seen in the chart below. But, just before the May high, the ratio hit a lower high. While it kept pace with each rally off the June low, and again off the late August low, look at its behavior since the October nadir: It's done nothing but decline, save for a brief perking-up in this past week.

In other words, the biotech sector's pace of outperformance has slowed dramatically since the Nasdaq has started to do well. So I think that, even though big tech names dominate the index, the biotechs are affecting the underlying statistics, despite its lack of any immense impact on the Nasdaq's price. This is almost the only plausible explanation I can come up with for the divergence I described above. (The Philadelphia Semiconductor Index (SOX) hasn't been acting too well, either -- something we've already covered.)

For those who don't recall, the bios topped out in February 2000 and in August 2008. I watch them for this very reason. The $1,000 Nasdaq stocks get all the glory, but these biotechs may be the soldiers behind those generals -- and if the soldiers are lagging, the generals are unlikely to fight this war on their own.


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