Of all the glories of the bull market, nothing has matched the astounding comeback in the Nasdaq. A few years ago, a common riff among middle-aged Wall Streeters was that "we won't see the Nasdaq back at 5000 in our lifetimes." Now, even with the two-day selloff last week, the tech-laden index hovers at 4128, just 18% below its record close of 5039 on March 10, 2000, at the peak of the dotcom craze. In 2013, the Nasdaq Composite surged 38.3%, waxing the S&P 500 by around 10 points, and it has even managed a small gain this year in a generally falling market.
If you believe the champions of the Apples, Googles, and Facebooks, the Nasdaq will soon get past whatever nastiness caused last week's temblors, then bust through the 5000 barrier, and keep on going from there.... But my math leads to me to a very different conclusion: The Nasdaq's prices are severely stretched. Whether such calculations will ultimately lead to a correction in the tech index, of course, depends on whether investors care about linking share prices to such antiquated notions like profits.... To be sure, Google, Apple, and many others have been formidable growers over the past few years. But recent history shows that it's unlikely their spectacular expansion will persist. Over the last four quarters for which they reported, Google grew revenues by 3.3%, and Apple suffered a severe decline in sales. True, the Nasdaq's ascension is a near miracle that almost no one foresaw. The best bet is that the age of miracles, Nasdaq and otherwise, is over.
Should you worry when you read such things? Not if your time horizon is still 5-10 years out, plenty of time to recover from any disappointments in 2014. But I am concerned there may be SMI readers who haven’t learned to take the market’s ups and downs in stride and will become unduly alarmed if the market tanks. Hopefully they’re absorbed the lessons of the long-term view that we try to teach, and won’t respond with any radical (and previously unplanned) steps.
If you find yourself in the worried/concerned/alarmed crowd, remember we’ve got our “Bear Alert Indicator” in the Trend Analysis section of the Advanced Strategies page. As the table shows, the S&P 500 would have to close below the 1,571 area to trigger this indicator. That’s about 12% below current levels (even after taking into account today’s weakness). If you feel the need, you can reduce the tension by using this indicator as a pressure release valve to cut back your stock holdings per the guidelines in this article. Alternatively, you can move some of your assets out of Upgrading (or Just-the-Basics) into our DAA strategy as Mark explained in "The Benefits of Blending Upgrading and Dynamic Asset Allocation."