What Nasdaq at 5,000 Means

What Nasdaq at 5,000 Means

15 Years Isn’t Unusual

Is This Stock a New Nasdaq Liquid Leader?

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In March 2000, the Nasdaq Composite had nearly doubled during the prior six months and, on the 10th of the month, reached the level of 5,132. And it’s never been that high since.

That was the height of the Internet bubble, and to give you an idea how crazy things were back then (I had started working at Cabot nine months before), I vividly remember a delivery guy coming into the office, dropping off a couple of packages and noticing our “whiteboard” of current recommendations. (We owned JDS Uniphase, Yahoo, EMC, Qualcomm … a bunch of the hottest stocks.) He wasn’t a subscriber, but he pulled Carlton Lutts over and started talking about each stock in detail, telling stories about how much money he had made and what he thought about each stock’s prospects. Nothing against delivery guys, but Carlton came over to us afterwards and said “My God! Now deliverymen are experts in the stock market!” His antennae were up for a top.

I also remember that Carlton kept a little notebook with him all the time, writing notes and even snipping out articles from the newspaper. (Back then most of us still got news from the newspaper, not the Internet.) And he kept all his notebooks (going back 20-plus years) here at the office. Well, in mid-March 2000, he cut out and pasted an article about a taxi cab driver in Boston who was getting rich off stock picks, and giving advice to his customers. I think the article was published literally within two or three days of the market top!

While it was hectic, I consider myself very lucky to have started my career at the tail end of one of the biggest bubbles of all time. The bubble and ensuing bear market accelerated my learning process more quickly than if I’d seen more sedate markets in my first few years in the business!

In the 16 years since that top, there have been plenty of ups and downs but now, for the first time since the major top in March 2000, the Nasdaq is knocking on the door of the 5,000 level. And that has many investors wondering what, if anything, it means. I have a couple of thoughts.

First, the fact that it’s taken 15 years to climb back close to the Nasdaq’s mountaintop isn’t unheard of. After the generational top in 1929, it took the Dow a whopping 26 years to reach new all-time highs. In the 1970s bear market, the S&P 500 didn’t decisively leap above its 1973 peak until about nine and a half years later. So the 2000-2015 stretch between peaks (if the Nasdaq does punch out to new highs soon) is in the middle of those two.

Second, the Nasdaq might be near the level it was 15 years ago, but that’s about the only thing that’s the same. Back then, investor sentiment was at incredible heights. Today, there’s some short-term froth, no doubt, but we don’t know of anybody quitting their jobs to day trade or plowing money into super-speculative options and futures (a common occurrence back then). And general sentiment about the country was sky-high in 2000—there was no terrorism, wars, unemployment or eurozone issues, just rapid growth with no inflation.

In fact, one of my favorite articles last year revealed that just 13.8% of U.S. households owned individual stocks in 2013, which is a bare-bones measure of speculative sentiment. (We’re not talking about 401(k)s or mutual funds, but actually owning an individual stock.) That was down from 21.2% in 2001—in real people terms, a 35% drop over a dozen years. Clearly, there’s a lot more buying power still on the sideline now than there was 15 years ago.

But what does Nasdaq 5,000 mean you should do right now? Well, to be honest … not all that much. I often see people trying to trade based on some popular index level (Dow 15,000, etc.) and it almost always goes wrong. For proper market timing, you want to look at the current state of affairs.

The good news is that the current environment is turning bullish—the major indexes have lifted out of multi-month trading ranges, and there have been a ton of stocks that have broken out powerfully, too. I do worry a bit that short-term sentiment is elevated—again, nothing like 15 years ago, but the giddiness among subscribers and other investors lately tells me some potholes and shakeouts are possible, even likely.

Still, the main trends of the market and leading stocks are up, and that’s what counts. I’m focused on companies that have everything I’m looking for—a revolutionary product, big barriers to competition, addressing a mass market, with huge sales and earnings growth and (just as important) huge earnings estimates. Plus I want at least some recent strength on the stock chart.

One of the few stocks that has all of the characteristics of a potential big winner is Twitter (TWTR), which I wrote about in Cabot Top Ten Trader two weeks ago:

“Twitter is a one-of-a-kind company with a one-of-a-kind service that’s producing rapid (nearly triple-digit) revenue growth and skyrocketing earnings as the firm monetizes its base of 288 million users. Throw in tremendous trading volume, which allows institutional investors to buy and sell freely, and that’s why Twitter has surged recently—stocks with all of these sterling characteristics don’t grow on trees. The company’s fourth-quarter report was very strong: timeline views grew a solid 23% from the prior year (to 182 billion!), and thanks to myriad new and innovative advertising products and initiatives, ad sales per timeline view surged 60%. The only remaining worry here is whether Twitter’s user base has topped out (it actually fell a few million from the prior quarter), which would obviously limit future growth. But management said the December drop in users was mainly from an update in Apple’s software (i.e., a one-time event) and that user growth should resume in the quarters to come. Yes, the valuation is high, but the top brass has already guided to a huge 2015 (revenues up 65%, and even that is likely conservative), and despite the recent growth, Twitter’s users are being monetized significantly less than users on Facebook and other social media, so there’s plenty of room for growth. It’s a big story and a potential liquid leader.”

My only hesitation with TWTR is that there’s a good chunk of resistance in the 50 to 52 area. Still, I think a small position (maybe half or two-thirds what you normally buy, dollar-wise) somewhere in the 46 to 49 area can work, with a loose stop near 42 and with the idea of adding more should you develop a profit.

Sincerely,

Michael Cintolo
Chief Analyst, Cabot Market Letter
And Cabot Top Ten Trader

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