NASDAQ 100 TOPS 200-DAY LINE... One theme I keep repeating is the need for Nasdaq leadership during any fourth quarter rally. I'm happy to report that on the first day of the fourth quarter the Nasdaq 100 led a very impressive market rally that could carry through the rest of the year. Chart 1 carries three bullish pieces of information. First, the Nasdaq 100 Shares (QQQ) broke through their 200-day moving average. Second, the QQQ did so on the strongest volume in a month. Third, it was the strongest percentage gainer of the major market indexes and continues to show new market leadership. The QQQ/S&P 500 ratio line, which bottomed in mid August, hit a new two-month high today. Let me demonstrate why Nasdaq leadership is so important to the rest of the market.
WHY NASDAQ LEADERSHIP IS IMPORTANT ... Chart 2 is a ratio of the Nasdaq 100 divided by the S&P 500. When the ratio is rising, the Nasdaq is outperforming the S&P which is good for the market. When the ratio is falling, the Nasdaq is underperforming the S&P which is bad for the market. The Nasdaq/S&P ratio bottomed in October 2002 (green circle) which marked the end of the three year bear market that started in early 2000. The Nasdaq led the S&P higher throughout the entire 2003 market rally. The Nasdaq/S&P ratio peaked at the start of 2004 (red circle) which started a downside market correction that lasted until August. The green arrow to the bottom right shows the ratio bottoming in mid-August. [That's the upturn shown in Chart 1]. The main point of the chart is to demonstrate that a rising ratio (Nasdaq rising faster than the S&P 500) is a necessary ingredient if the market is starting another upleg.
