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Stocks Facing Wall of Worry, or Well of Despair?


History doesn't always repeat, but it often rhymes.


An old market saw says stocks like to climb a wall of worry. But occasionally, they also like to plunge down a well of despair. The trick is figuring out whether we're looking at a wall, or well.

According to Minyanville's Jason Roney of Sharmac Captial Management, what looks like a wall from afar may reveal itself as a well upon closer inspection. The Nasdaq 100 (NDX), (QQQQ), index has now had 10 consecutive weekly higher highs, only the third time that feat has been accomplished in at least 15 years. According to Roney, the prior two were January 2000 - that would be a pretty deep well - and December 1998 - that would be a pretty steep wall.

So which one do we choose, wall or well? Roney says this observation requires a grain of salt: "December '98 and January '00 were much different market environments and it's a sample size of two periods that were too statistically irrelevant to predict performance. But, he adds, "a number of divergences over the past few days (Research in Motion (RIMM), Google (GOOG) and Apple (AAPL) which accounted for half the Nasdaq 10-week rally in points failed to make new highs with the index on Monday." That, combined with the unusual weekly pattern of 10 higher highs may suggest the analog of what looks like a 1-3 day top is actually a more significant top.

Meanwhile, prompted by Roney's observations, Minyanville's Todd Harrison found the following datapoints worth noting:

  • From March 17 to May 13, almost half of the entire NDX gain (311 points) was a function of three stocks-Apple (AAPL), Research in Motion (RIMM) and Google (GOOG).

  • Those stocks have since made lower highs while the index has not. That's a negative divergence in momentum leadership names.

  • We've seen this movie before. On October 23, 2007 half of the year's entire gains (400 points) came from the same three stocks-AAPL, RIMM and GOOG.

  • The NDX proceeded to lose 25% from that point until… yep, March 17th.

Fine, the Nasdaq may indeed be facing a deep well of despair, but what about the S&P 500 (SPX), (SPY)? According to Minyanville contributor Jon Markman, a columnist at MSN money and producer of daily investment commentary in his Strategic Advantage and Trader's Advantage advisory services, there are some reasons to believe it's not just the Nasdaq peering down a well.

Markman notes that back in bear market of 2001, the S&P rallied hard off a low set in the third week of March to a peak in the third week of May (the week before Memorial Day weekend). The S&P 500 hit its 200 Exopnential Moving Average on that Friday, May 18th.

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Interestingly, Markman observes, this year, the market also rallied hard off a low set in the third week of March and touched its 200 Simple Moving Average yesterday, May 19.

Of course, we know what happened next. Back in 2001, the market then went on to fall 26% through the middle of September. "If that were to happen again," says Markman, "give or take a few percentage points, the S&P would fall to around 1080; not saying that it will happen, but simply raising the possibility."

And how about this for a final cause for pause: "If you think about it," Markman says, "the financials, which are the backbone of the market, are actually in much worse shape now than then." Of course the spike down in Sept 2001 was due to the terrorist attacks attacks. " But, Markman adds, "there's an old Wall Street adage that states, "Bad things happen in bear markets.""

History doesn't always repeat, but it often rhymes.

No positions in stocks mentioned.

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