The Nasdaq Signal Calling for New Highs

On Thursday, the Nasdaq Composite (COMP) roared to record highs on the back of an impressive morning rally from Facebook stock following the social media company's better-than-expected earnings. However, as the day wore on, those gains evaporated, with the tech-heavy COMP ending the day with a loss. Interestingly, the index had an intraday high of 6,460.84 and low of 6,318.62 -- a 2.251% difference -- but closed just 0.6% lower. We decided to look at what this price action could mean for stocks going forward. 

Specifically, Schaeffer's Senior Quantitative Analyst Rocky White looked at all Nasdaq returns following a session with a swing of 2.251% or more, but also where the index closed less than 1% lower. White's research found 25 similar occurrences since 2010, the first full year of the current bull market, and while the day immediately after such a session often ends poorly -- echoed in today's market weakness -- the following weeks look quite sunny for stocks. 

As you can see, from one week to one month after a signal, the Nasdaq tends to outperform its anytime returns. In fact, the COMP's one-month return after a signal more than doubles its anytime return for the same time period. Standard deviation is also much higher across the board, suggesting volatility could be elevated in the coming weeks. 

Looking back, this is the first such signal of 2017, with the last one coming in November 2016 -- just after the U.S. presidential election. In the table below that lists the previous 25 signals, you can see how bullish recent Nasdaq signals have been. Even if you do believe it's a good time to buy stocks, make sure to check out best stocks and worst stocks in August.