Nasdaq Alarm Sounding for First Time in 10 Years

The IXIC has been outperforming the Dow, but that could change soon, if history repeats

Mar 22, 2019 at 1:09 PM
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The Dow Jones Industrial Average (DJI) is sitting on a loss for the month of March, recently dragged down by the Boeing (BA) 737 MAX 8 fallout, poorly received Nike (NKE) earnings, and today's inverted yield curve -- often seen as a precursor to a recession. On the other hand, the Nasdaq Composite (IXIC) is still pacing for a monthly gain of roughly 2%, thanks to recent strength from Apple (AAPL) and Micron (MU). Against this backdrop, the Nasdaq is set to trigger a signal we haven't seen since June 2009, just three months into the current bull market.

nasdaq up dow down since 2000

Specifically, assuming current gains hold, this will be just the 10th time since 2000 that the Nasdaq was up at least 2% in a month at the same time the Dow was negative. Prior to June 2009, the last time that occurred was in December 2008, during the financial crisis, according to data from Schaeffer's Senior Quantitative Analyst Rocky White.

Looking at the indexes' performance after these signals is less than encouraging, though, particularly for the Nasdaq. The index was down 0.91% a month later, on average, and higher just 44% of the time. That's compared to an average anytime gain of 0.68% with a 57% win rate, looking at data over the past 20 years.

It's the same story three and six months out. Three months after the Nasdaq handily outperforms the Dow, the index was down 5.29%, on average, and higher just one-third of the time. Six months later, the IXIC was down 5.42%, on average, with a paltry 44% win rate. Those negative returns compare to average three- and six-month anytime gains for the Nasdaq.

Meanwhile, the Dow's post-signal returns are better than the Nasdaq's, but still relatively lackluster. The blue-chip index's average 0.47% gain a month later is on par with its average anytime one-month gain, but looking three months out, the Dow was down 0.61%, on average, compared to an average anytime gain of 1.34%. The index's average post-signal six-month gain of 0.8% is also much lower than its average anytime six-month return of 2.73%, looking back 20 years. Plus, volatility tends to run hotter than usual for both indexes, based on the higher standard deviation of returns after signals.

Dow and Nasdaq after signals vs anytime

However, seasonality could help the indexes stay afloat in the near term. The index is coming up on its best month of the year, averaging an April gain of 2.27% over the past two decades. It's the only month the DJI has averaged a gain of more than 2%. April, meanwhile, has been the third-best month of the year for the Nasdaq, preceded by only October and November.

Dow monthly stats 20 years

Nasdaq monthly stats


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