This Tech Signal Has Gone Off Just One Other Time Since March 2009

The Nasdaq Composite's (COMP) underperformance of the Dow Jones Industrial Average (DJIA) last week could suggest now is the time to buy beaten-down tech stocks

Nov 14, 2016 at 1:41 PM
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The Nasdaq Composite (COMP) just wrapped up its best week since February, tacking on 3.78%, despite weakness in so-called "FANG" stocks. However, the tech-rich Nasdaq's gains were nothing compared to those of the Dow Jones Industrial Average (DJIA), which is still assailing record highs after wrapping up its best week in years. Below, we take a look at how the Nasdaq has performed after big weekly gains, and how its underperformance vs. the Dow -- a very rare signal sounded just one other time since March 2009 -- could suggest now is the time to buy tech stocks, if history is any indicator.

Going back to 2010, the Nasdaq has gained 3.75% or more in one week 17 times, including last week, according to Schaeffer's Senior Quantitative Analyst Rocky White. The last time the COMP enjoyed at least two of these weeks in the same year was 2012, and the index was notably higher three months out both times. After the February rally, the COMP also did quite well over the short term, rallying 5.89% in the subsequent three months.

Nasdaq big weeks 1 Nov 14

On average, the COMP enjoyed a three-month return of 2.22% after weekly gains of 3.75% or more, and was positive 62.5% of the time. However, those figures pale in comparison to the COMP's anytime returns since 2010, with the index averaging a three-month gain of 3.46%, and positive 72.3% of the time. Across the board, in fact, the Nasdaq tends to underperform itself after these big weeks, looking at one, two, and four weeks out.

Nasdaq big weeks Nov 14

But, as alluded to earlier, it's very rare for the Nasdaq to gain 3.75% in one week and underperform the Dow, happening just 21 times since 1972, according to White. The last time this signal sounded was July 2010, and before that it was March 2009 -- widely known as the post-financial crisis bottom. In both instances, the Nasdaq was remarkably higher going out three months, with gains of 9.35% and 18.96%, respectively. Again, that's compared to an average three-month gain of 3.46%, going back to 2010.

Nasdaq underperform Dow 1

Plus, the Nasdaq has performed much better following big weeks where it underperforms the blue-chip index, compared to big weeks where it outperforms the Dow. When the COMP racks up a weekly gain of at least 3.75% and outshines the DJI -- an occurrence that's happened 134 times since 1972 -- it's averaged a three-month gain of 4.82%, and was positive 63.4% of the time.

After those rare instances when the COMP racks up a huge weekly gain and underperforms the DJI, the numbers are significantly higher across the board. The COMP has been positive at least 70% of the time at all short-term checkpoints, with average returns handily exceeding returns when the roles are flip-flopped. In fact, the average one-week return is 1.96% after the Nasdaq's big weekly gain falls short of the Dow's -- about four times the average gain on the flip side.


Nasdaq underperform Dow 2

In conclusion, a huge week in and of itself isn't necessarily a bullish indicator for the Nasdaq Composite (COMP). However, a huge week that still underperforms the Dow Jones Industrial Average (DJIA) has resulted in stellar short-term returns for the tech-rich COMP. While each stock should be considered in its own right -- an Expectational Analysis view is always best -- history suggests now may be a good time to scoop up some of those beaten-down tech stocks.

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