Tech Outperformance Could Be a Bullish Sign for Stocks

We also dive into similar years for the Nasdaq and SPX

Senior Quantitative Analyst
Mar 14, 2018 at 7:00 AM
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We are 50 days into 2018, and already it has been a turbulent year for stocks. The S&P 500 Index (SPX) was up over 7% within the first month of trading, but quickly reversed and found itself down on the year by nearly 4%. It has bounced back strong in March, sitting at a year-to-date gain of about 4% -- which has been the norm since 2010. Performance-wise, the S&P 500 has been no match for the Nasdaq Composite (IXIC), though, which is up over 9% in 2018.

This week, I’m going to look at how the first 50 trading days of 2018 compare with previous years, to see what we might expect for the stock market going forward. Additionally, I’ll look to the historical record book to see if Nasdaq outperformance has been bullish or bearish for the rest of the year.

First 50 Days for the SPX and Nasdaq

This first chart simply shows the S&P 500 return in 2018 vs. its typical return during the current bull market, and then more generally over the past 50 years. As I mentioned above, the S&P 500 was up, down, and now sits right at the average return since 2010. If things calm down and the S&P 500 behaves as it has on average, we’ll see some decent gains over the next two months, followed by a few months of stagnation.  

SPX Returns IotW Chart 1

We have Nasdaq data back to 1972, so the green line in the chart below isn’t quite a 50-year lookback. The tech-heavy Nasdaq behaved like the S&P 500 through the first couple of months of the year, with a rally and then sharp pullback. However, the rally off the bottom since early February has been much stronger for the Nasdaq. The index has overtaken the early year highs and sits just below a 10% gain on the year.

Nasdaq Returns IotW Chart 2

Similar Years to 2018

Last week, my article showed a chart of the S&P 500, along with other years that were similar in terms of chart path. Those similar years tended to lead to a choppy market for the rest of the year. Here, I’ll do the same type of analysis using the Nasdaq.

According to my method, below are the four years that most resemble the stock path so far this year for the IXIC. Unlike the similar study with the S&P 500 -- which showed the returns going forward chop around for the rest of the year -- the Nasdaq returns look impressive in three of the four years, including last year. The only year that looks troubling in the chart below is 2006.               

Nasdaq Similar Return Chart 3

The table below shows the six years most similar to this year. The numbers confirm what I guessed from the chart above. The Nasdaq has typically performed quite well when the chart path looks like it does at this point.

Nasdaq Years Chart 4

When the Nasdaq Outperforms

So, what has it meant when tech is leading the year-to-date gains at Day 50? Going back to 1972, I found years where the Nasdaq was positive by 5% to 15%, and outperformed the S&P 500, which is also positive, by at least 3 percentage points.

When tech has led, stocks have tended to do very well for the rest of the year. There are eight years meeting the specifications above. For the rest of the year, the Nasdaq was positive seven times, averaging a gain of over 15%. Typically, the index has been positive less than 70% of the time, averaging a gain of 8.39%, looking at anytime data since 1972. (Note that the anytime returns below are slightly different from above. That’s because the returns above are specifically following March 12 of each year, but in the table below, they follow the 50th trading day.)

Nasdaq IotW Chart 5

Below I use the same criteria, but look at S&P 500 returns. Again, the returns are impressive when tech leads. The index was positive every time over the next six months and rest-of-year. When tech is leading the way through the first 50 trading days, it tends to be a good sign for stocks.

Nasdaq IotW Chart 6

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