DOES THE 90-10 RULE HAVE ANY BEARING?

The NASDAQ 100 rebounded about 2.9% following a three-day 11% rout. As widely discussed the move from March’s low is perhaps the most imbalanced in history and the recent decline is insignificant if one purchased the largest technology shares almost six months ago.

Many years ago, when the market was dominated by fundamental analysts, I recall attending a presentation by one of the few technical analysts of the day, Alan Shaw…aka the “God Father of Technical Analysis.”

Shaw referenced the 90-10 rule which essentially states there is a 90% probability that a security or index will retrace 90% of a parabolic move, bottoming about 10% above the price where the rally commenced. The issue at hand is where the issue/index will top.

If this rule is to pertain today and if you think a 83% five month rise in the NASDAQ 100 is parabolic, then hypothetically the NASADQ 100 should decline to around 7300. The NASDAQ 100 closed yesterday at 11,395 or about 1,044 below its September 2 peak.

If the above does occur, the approximate 41% decline would be about half of the 80% decline the NASDAQ 100 experienced in 2000 when the dot com bubble imploded.

As noted many times and as per First Trust, approximate 6 years of sales were compressed into six months for the mega sized technology companies. Based upon First Trust, the NASDAQ 100 issues may be fully priced.

And if the “God Father of Technical Analysis” 90-10 rule is of any bearing; yesterday’s NASDAQ 100 advance is nothing other than a dead cat bounce. Unfortunately, only history will answer this question.

What will happen today?

Last night the foreign markets were mixed. London was down 0.60%, Paris down 0.22%, and Frankfurt up 0.09%. China was down 0.61%, Japan up 0.88% and Hang Sang down 0.64%.

The Dow should open nominally lower on questions as to whether the rout in tech shares is over. The 10-year is unchanged at 0.70%.

 

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. The information contained herein has been compiled from sources believed to be reliable; however, there is no guarantee of its accuracy or completeness. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. The material provided in Daily Market Commentaries or on this website should be used for informational purposes only and in no way should be relied upon for financial advice. Please be sure to consult your own financial advisor when making decisions regarding your financial management. Members of FINRA and SIPC, Capitol Securities Management is a privately owned full-service retail brokerage and investment advisory firm headquartered in Richmond, Virginia. For nearly 30 years, we have been serving the needs of our investors. Today, more than 200 Capitol Securities Management investment professionals and support staff serve approximately 18,000 customer accounts from Southern Florida to the New England coast.