Indicator of the Week: What Happens After Nasdaq 6,000?

The Dow tends to struggle at 1,000-point levels, but that's less of a concern for the Nasdaq Composite (COMP)

Senior Quantitative Analyst
Apr 26, 2017 at 7:30 AM
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Yesterday, the tech-heavy Nasdaq Composite (COMP) hit the 6,000 mark for the first time ever. The Dow tends to struggle after hitting these round numbers, which I wrote about last December. Unsurprisingly, this made me wonder if we see the same tendency for the Nasdaq as we do with the Dow. Below, I look at how the COMP has performed after hitting these round numbers, to see if 6,000 is something we should be worried about.

nasdaq 6000 april 25

COMP Returns After 1,000-Point Levels Since 1995

The Nasdaq first crossed 1,000 in 1995. Going back to then, I looked at how the index performed after running into even 1,000-point intervals, after being below them for at least a month straight. The theory on why these even levels are problematic is that they are psychological dividing lines between "cheap" and "expensive." An index hitting an even level might be a prompt to an investor to re-evaluate his or her positions and exposure.

There have been 20 occurrences of running up to these potential resistance points. Comparing these returns to typical returns since 1995 (shown in the second table below) seems to support the theory above. Other than the one-month time frame, the Nasdaq tends to underperform, going by average return and percent positive. For example, six months after hitting an even 1,000 level, the COMP averaged a very slight gain of 0.28% and was positive just 55% of the time. The usual six-month return is a 6.07% gain and positive 70% of the time, since 1995.

nasdaq after 1000 point intervals april 25

COMP Returns After 1,000-Point Levels Since 2003

Those average returns in the first table above, especially at six months and a year, are strikingly low. These are skewed somewhat because there were multiple signals just ahead of the bursting of the tech bubble in 2000. I decided to look at the numbers since the index bottomed in late 2002. Again, the one-month returns easily lag typical index returns. Looking at the Nasdaq beyond one month after a 1,000-point level is taken, the average returns are only slightly less than normal, while the percent positive is better than usual. Based on the numbers since 2003, I would say the 6,000 level isn't much to worry about.

nasdaq after 1000 point intervals 2 april 25

 

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