Indicator of the Week: Why Tech's Lead Bodes Well for 2015

Is it good when the Nasdaq is beating out the Dow?

Senior Quantitative Analyst
Apr 15, 2015 at 7:45 AM
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This week I'm taking a look at the year-to-date returns on three major indexes: the Dow Jones Industrial Average (DJIA), the S&P 500 Index (SPX), and the Nasdaq Composite (COMP). The tech-heavy COMP leads the other two indexes by a few percentage points this year. Does it mean anything going forward when the COMP leads the other two bigger-cap indexes? The analysis below might help us answer that question.

First, here is a table showing how the indexes have typically performed from April 15 of each year through the rest of the year. The COMP has averaged the biggest gain for the rest of the year, at 9.34%. Unsurprisingly, the returns for that index have been the most volatile, as measured by the standard deviation. The SPX and Dow have averaged a return of 6.52% and 5.66%, respectively.

Returns in last 40 years

When the Nasdaq Leads: The COMP is up just over 5% so far this year, which leads the SPX (up 1.79%) and the Dow (up 1.2%). Over the last 40 years, the COMP led the indices year-to-date through mid-April almost half the time (18 of 40 years). The table below summarizes the returns over the rest of the year when this occurs. It's a good sign when the Nasdaq leads. The average returns in the table below outperform their typical returns (seen in the table above). Also, each index has been positive more than 80% of the time for the rest of the year when the COMP leads at this point in the year.

When Nasdaq Leads

Refining the results even more, the table below shows how the indexes have performed when their year-to-date rankings are exactly as they are now. That is, the Nasdaq leads the other two and the SPX leads the Dow. Similar rankings have occurred 11 other times, and the returns are even more impressive. In those years, each of the three indexes averaged double-digit percentage gains for the rest of the year. The two bigger-cap indexes were positive all 11 times, and the COMP was higher 10 of 11 times.

Rest of year returns when Dow trails

Finally, the table below shows the individual returns for the 11 times the year-to-date index rankings are the same as they are now. For what it's worth, eyeballing the returns looks like this year most resembles 2003 (the Nasdaq up about 4% to 5%, and the other two indexes positive by less than 2%). The market exploded higher the rest of the year, with the COMP gaining 44% and the other two up over 20%.

Returns from 11 identical years
 

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