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Nasdaq Market in New York.
Michael Nagle / Bloomberg
On March 9, the
Nasdaq Composite index
he did something he hadn’t done in nearly 20 years: He did better than
Dow Jones business average
with more than 3.5 percentage points – 3.59, to be precise.
Some believe it is bullish for the market as a whole for the tech-heavy Nasdaq to outperform the blue slits by this amount. But a careful reading of history suggests the opposite: Both major indices are not healthy divers.
If you were to focus on just one trading session to make this point, consider the day when the Nasdaq outperformed the Dow by the largest amount: January 3, 2001. On that day Nasdaq (or alpha) performance over the Dow is a staggering 11.4 percentage points. No other day since the creation of the Nasdaq in February 1971 has come close to that big alpha. But it was hardly a bullish omen. In fact, it came in the middle of the bear market caused by the explosion of the dot-com bubbles.
That’s just one data point, of course, but it’s consistent with the historical record. More often than not, the increased frequency of days with a major Nasdaq alphas has been a sign of impending market weakness.
We definitely saw that at the top of the dot-com bubbles. Over the three months prior to that peak, no less than 14 Nasdaq alpha trading sessions over the Dow were at least two percentage points. Another three months over the past 50 years has not seen so much positive alphas between the two indices.
In fact, during a nearly 11-year global bull market between the March 2009 low and the February 2020 high, there was only one trading session with that big Nasdaq alpha. Suddenly, there have only been two days over the past month.
It’s not just advanced Nasdaq alphas that are of concern. Alphas are also very negative. That’s interesting, because there’s been a recent build in the number of days like that as well. Over the past three months, for example, there have been four trading sessions with a Nasdaq alpha greater than minus two percentage points. This brings the total number of major negative or positive alphas to six over the six months. That is the biggest thing since 2002.
This is illustrated by the accompanying chart, which shows the number of positive or negative alphas by year from the early 1970s. In addition to the months just before the dot-com bubble peak, and then the bear market, this year is shaping up to be a record.
How worried should you be about all of this? At least something, according to a study done for Barron’s with performance tracking company Hulbert Ratings. That analysis examined every trading session since the Nasdaq Composite was created in 1971, focusing on those days in which there was a large alphas (more than two percentage points, positive or negative). A higher frequency of such days was associated with lower-than-average market performance over the following three months. Although the correlation was relatively small, it nonetheless reached the 95% confidence level that statisticians typically use when determining a significant pattern.
You should not be surprised by this product, as there is a healthy market as one that burns on every cylinder. While tiny differences may mean nothing, and big differences may not be a big difference with others, it will be worrying when big differences become more frequent – as they have been recently. .
Even if you are not deceived by this statistical significance, these results show that the market is currently in danger. At the very least, you shouldn’t mark days like March 9 in which the Nasdaq alpha was a major improvement over the Dow.
Mark Hulbert contributes regularly to Barron. His Hulbert Ratings monitors investment newsletters that pay a flat fee for being audited. He can be reached at [email protected].
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