Nasdaq With a 2-Handle: How Will Investors React to a Comp Under 3000?

The morning's selloff didn't prompt as solid a snapback as you might have predicted.
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After seeing it surge as high as 5132 this spring, investors Monday were trying to figure out what to make of seeing a 2-handle on the

Nasdaq Composite

for the first time in over a year.

Hurt by collateral damage from a

Hewlett-Packard

(HWP)

earnings miss, and from continuing uncertainty surrounding the presidential election, the Nasdaq fell below 3000 at the get-go in the morning, its first time beneath that level since Nov. 2, 1999. In the past, whenever the index had approached 3000, investors had stepped in to buy, which they in fact did once it had swooned to an intraday low of 2859.

But the buying strength wasn't enough to keep the Nasdaq above 3000. And while that is understandable -- many buyers continue to await the end of the electoral confusion -- it is also worrisome. A week ago, it looked like the Nasdaq was finding its feet. Now it looks like a nervous wreck.

Reversal

Technical analysts are hoping that the lows of Monday will offer some kind of resistance.

"We're talking about 2700, 2800 as next support," says

Scott & Stringfellow's

Richard Dickson. "It would be nice to see the Nasdaq stabilize around those levels." Dickson notes that so far, most areas of the market have held up decently -- almost the opposite of what was happening this time last year, when the tech-heavy index was surging but the average stock was suffering. With the

Dow Jones Industrial Average

, the

S&P 500

and the

NYSE Composite

still well above the October lows, things aren't as bad for the market overall as many might think.

Breaking Through 3000
Nasdaq pulls a '2-handle': It's back in the 2000s

But Dickson also worries that if the Nasdaq continues to slump, investors will become disheartened, throwing in the towel on the market in general.

Others note that the Nasdaq appears deeply oversold.

Lehman Brothers'

chief technical analyst, Jeff deGraaf, notes that on Friday 89 of the 100 stocks in the

Nasdaq 100

fell. "That's as heavy as it's been in the last two years," he says.

Nervousness

DeGraaf also notes that the ratio of puts to calls and the

CBOE Market Volatility Index

are both relatively high, signs that there's a fair degree of nervousness in the market. That's actually a good sign, because when investors are scared it often means that they've sold stock too aggressively.

It's an environment where stocks could easily snap back -- something that deGraaf reckons will probably happen. And this jibes well with the general sense of what's going on in the market, that the uncertainty surrounding the election has prompted something of a buyers' strike, and once that uncertainty begins to ebb stocks will move higher. We may even be near the point where buyers come in because, election be damned, the market looks cheap to them.

But it will be very important that any election snapback be sustained. Says Dickson: "The big shock could be we get a little relief rally and then we go down again. If that happens, we've got some real problems."