What did the Nasdaq's Wednesday dive really signal?

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Halloween is still a couple of days away, but it seems no one told the market. A series of failed rallies and then Wednesday's nearly three percent shellacking of the tech-heavy Nasdaq Composite ($COMPX) had a lot of folks pretty spooked.

All it took was for enterprise software titan SAP (SAP) to post some disappointing quarterly results (and chipmaker Advanced Micro Devices (AMD) to get its name dragged into the Galleon Group insider trading scandal), and suddenly tech stocks were wobbling like Weebles. Even the Four Horseman of the Nasdaq -- Amazon.com (AMZN), Google (GOOG), Apple (AAPL) and Research in Motion (RIMM) -- fell 0.4 percent to nearly 5 percent, respectively.

For a rally that's been predicated on technicals and a voracious appetite for risk, this was not a reassuring sign. The dollar rose and risky tech stocks fell? Uh, oh. After all, a return to the flight to safety is the last thing equity investors want to see right now.

Recall, that the Nasdaq has been on a torrid run since the March low, rallying 65 percent. The broader S&P 500 ($SPX) and Dow Jones Industrial Average ($INDU) have posted remarkable gains, too, but the Nasdaq is just shredding those indexes, to the tune of 10 and 15 percentage points, respectively. That's what an appetite for risk looks like. Growth stocks outperform at such times, and the Nasdaq is loaded with them. If a flight to safety does indeed return, we'll know about it pretty fast -- just watch the Nasdaq head south.

The Nasdaq Is More Volatile


However, it's extremely important to remember that one day in the market doesn't make a trend (and that goes for today's big rebound as well, with the Nasdaq recouping more than half of Wednesday's loss in midday trading). The Nasdaq is simply more volatile than the S&P 500. That's not necessarily a bad thing. All it means is that over time, when the broader market moves up, the Nasdaq moves up more. And when the market falls, the Nasdaq falls harder.

Robert Stimpson is a growth guy. As a portfolio manager at Oak Associates and its Rock Oak Core Growth (RCKSX), River Oak Discovery (RIVSX) and Black Oak Emerging Tech (BOGSX) funds, he's well acquainted with risk. Stimpson thinks we're still in the early stages of a six- to eight-quarter bull market, but he's by no means surprised by the recent pullback.

"We're in the midst of earnings season," Stimpson says. "The market is trying to digest all this data. It needs to confirms where we've come from and justify the prices we've achieved."

Is a Big Correction Coming?

True, some bulls who've ridden the rally all the way up are starting to pull in their horns in a bit. Barry Ritholtz, chief executive and director of research at FusionIQ, told clients on Tuesday that he sees "a significant increase in the odds for a fairly substantial correction -- in the 5 percent to 15 percent range -- over the next 60 days."

But that would hardly be the end of the world. As dumb as this sounds, stocks don't move in a straight line. Never have, never will. And yet, too often retail investors forget that. Anytime a security or index soars 65 percent in just seven months, some consolidation, contraction or correction is to be expected.

And, yes, it is healthy. Would you rather have another bubble?

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