Nasdaq 5,000: 3 Reasons for Caution

Last week the Nasdaq Composite reached the big round number 5000 level which it hasn’t seen since the tech bubble days of early 2000. A few other interesting things happened last week that should serve to add caution to investors who might have been thinking about jumping aboard the Nasdaq train:

1. Apple (AAPL) was added to the Dow Jones Industrial Average. This might sound like great news for AAPL shareholders at first blush, however, there’s just one big problem:

 

Stocks_added_to_Dow

Source: SentimentTrader

In the past 20 years stocks added to the Dow have performed extremely well in the lead up to their inclusion into the Dow and subsequently performed dreadfully. We already began to see a ‘sell the news’ reaction in AAPL on Friday as it printed a large black candlestick while closing at session lows:

AAPL_Daily_3.8.2015

AAPL is the largest component in every major weighted equity index given that it is the largest stock on the planet. It will be extremely challenging for equities as a whole to not undergo a correction should AAPL come under pressure in the subsequent days & weeks.

2. Last week the Nasdaq Composite (COMPQ) suffered a bearish MACD cross:

COMPQ_Daily_3.8.2015

The last couple of times this occurred in the COMPQ the index was much lower two weeks later. From my vantage point the bear cross that occurred last week is even more powerful given Friday’s large red candlestick and the Nasdaq 5000 hooplah from earlier in the week.

3. Record insider selling which is occurring simultaneously with record corporate buybacks:

Tech_Insiders_Sell

Source: Marketwatch

From Jason Goepfort of Sentiment Trader: “It seems odd that insiders would be selling their stock at the very time they’re directing their company to buy back that very same stock,” 

This is a troubling sign to say the least. Anecdotally, I am speaking to mid-level corporate execs at several large US corporations who simply can’t wait to cash in huge stock options packages over the coming years (some worth over $5 million at current share prices). There is literally an avalanche of executive option grants totalling well into the tens of billions of dollars that is waiting to flood the market over the coming years. Due to the vesting agreements most of these packages have a couple of years left before the lion’s share of the options vest and become available for trading. However, there is a huge supply overhang hanging over this market and it is very difficult to see how equities can continue higher without a constant flood of corporate stock buybacks staying on the bid.