Nasdaq Beating Blue Chips By Most in 2 Years

However, the Dow could turn the tables in the next three months

Mar 9, 2018 at 12:57 PM
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While the Dow Jones Industrial Average (DJI) is higher today, thanks to a strong jobs report and easing geopolitical tensions between the U.S. and North Korea, the blue-chip index has been underperforming its tech-rich counterpart, the Nasdaq Composite (IXIC). What's more, if recent history is any indicator, this could be a bullish signal for U.S. stocks -- and the Nasdaq could extend its quest for record highs heading into April.

Biggest Nasdaq Outperformance in 2 Years

Back in November, the roles were reversed: the Dow was handily outperforming the Nasdaq, which is typically a bearish signal. As of Wednesday's close, though, the IXIC had outperformed the Dow by more than 2.5% in five trading days -- something we haven't seen in more than two years, according to Schaeffer's Senior Quantitative Analyst Rocky White.

Since 2013, in fact, there have been just five of these signals. Prior to that, you'd have to go back to 2011, in which there were four signals. Unlike previous instances, though, the Nasdaq's gain during the most recent signal was under 1%, while the Dow's loss during the same time frame was steeper than 1%.

nasdaq outperfoms dow since 2011

Nasdaq Could Hit Higher Highs in Next Month

If past is prologue, the Nasdaq -- tracking for its sixth straight gain today -- could continue to outperform in the short term. On average, the index has generated a one-week post-signal gain of 1.07% -- more than three times its average anytime one-week return of 0.3%, looking at data since 2011.

Two weeks later, the IXIC was up 2.26%, on average -- almost four times the norm. And one month later, the Nasdaq was higher by 2.73%, on average, more than doubling its average anytime one-month return of 1.23%. What's more, the Nasdaq was higher 75% of the time across all three time frames, following big-time outperformance.

At the three-month marker, however, the Nasdaq tends to ease up. While the index was higher 62.5% of the time at this checkpoint, its average three-month gain of 2% is not only smaller than its average one-month post-signal gain, it's also smaller than the Nasdaq's average anytime gain of 3.69%. In other words, following signals, the Nasdaq tends to outperform up to a month later, but then pull back between the one- and three-month checkpoints.

nasdaq after signals vs anytime

Don't Count the Dow Out, Though

The Dow also tends to outperform vs. its anytime gains, though its average one- and two-week returns aren't as strong as the Nasdaq's. One week after a signal, the DJI was up 0.64%, on average -- roughly three times the norm. Two weeks after underperforming the Nasdaq, the Dow was up 1.55%, on average -- also about three times the norm -- and was higher 75% of the time.

Around the one-month marker, the Dow's average return of 2.67% is roughly in line with the Nasdaq's, and the percent positive is the same. This return is also healthier than the DJI's average anytime one-month gain of 0.94%, looking at data since 2011.

The three-month marker is where the Dow stands out most. The blue-chip index was up 3.07%, on average, after a signal -- better than its anytime return, and stronger than the Nasdaq's average 2% gain.

dow after signals vs anytime

In conclusion, if recent history is any indicator, shorter-term traders may want to focus on the Nasdaq, which tends to generate bigger-than-usual -- and bigger-than-Dow -- gains a month after signals. (In fact, these two rallying tech stocks sport attractive near-term options right now.) Speculators looking beyond the one-month marker, though, may want to stick with blue chips, as the DJI's average three-month returns after a signal exceed its tech-rich rival's.


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