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The Nasdaq's Stealth Rally

by: Alan Brochstein August 11, 2008 | about stocks: QQQQ    

Alan Brochstein

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While everyone has most likely been focused on the stunning rise and fall of Energy stocks or perhaps upon the inexorable decline in Financials, a broad segment of the market is showing signs of a potential powerful move:  The NASDAQ Composite.  While reasonable people may disagree with me, I don't think that the NASDAQ, which tends to be skewed towards "growth" stocks with minimal exposure to Large-Cap Financials and Utilities, never really went Bear on us.  Yes, as you can see in the chart below, for those traditionalists that define a bear market as a decline in excess of 20%, it actually did:

Nas_1_year

Download nas_1_year.jpg

The index peaked at 2861 intraday on 10/31 and bottomed at 2155 just 4 1/2 months later (pretty short for a bear market), falling 25%.  I would call the move a correction rather than a bear market.  I already cited the short duration.  The index has a beta that is significantly higher than the overall market (1.34 by my calculation), so perhaps that 20% rule needs to be adjusted to compensate for the additional volatility.  As you can see in the next chart, the index didn't change its general post-2002 trend of higher highs and higher lows.

Nas_10_years

Download nas_10_years.jpg

The 10-yr chart sure demonstrates the bubble and it's popping well, but the NASDAQ has been a steady performer since the big rally in 2003 from extremely oversold conditions, essentially tracking the market with some minor relative swings.  For my favorite perspective and a good lead-in to my conclusion, check out the 35-year chart:

Nas_35_years

Download nas_35_years.jpg

My observations:

  • Over longer periods of time, the NASDAQ outperforms the S&P 500 (it has outperformed the R2000 since 1987 as well)
  • 2001-02 was a BEAR, 2008 looks like a trivial pause (n.b. this is log scale)
  • The 1-year chart indicates a clear double bottom
  • Relative performance has been strong since March and in longer time-frames

I expect that the NASDAQ is worth watching closely here.  It is on the verge of breaking out, as it approaches its 200dma just 1% above the close.  The NASDAQ 100 actually closed above its 200dma.  Over the past couple of years, the 2415 area has served as support and resistance on several occasions, so a push up from here could prove meaningful.  According to my data, the PE on the NASDAQ 100 is just 18X.

Why might the NASDAQ be considered attractive in coming quarters and years?

  • Superior growth opportunities during what will probably be sluggish times
  • Better capital structures than the market in general, with less debt and CapEx
  • Limited Financials exposure (no Large-Cap banks)

For those who want a clearer understanding of the composition of the NASDAQ relative to the S&P 500, the following chart, comprised of data from Standard & Poors directly for the S&P 500 and from StockVal for the NASDAQ 100:

Nas_vs_sp5

Download nas_vs_sp5.jpg

While the NASDAQ composite, which has over 3000 constituents, has representation in all of the economic sectors, the market-cap exposures of the NASDAQ 100 are quite representative:  Huge IT exposure, with significant low exposures to Financials, Energy, Consumer Staples and Industrials.

I have nothing against NYSE listing, believe that there are many Financials that offer extreme bargains here (without debating the large-caps) and actually like Industrials, but, if one were to put all of one's eggs in one basket (not recommended!), the NASDAQ isn't so bad.  The bigger take-away is that in the coming years (which are likely to see modest economic growth at best), companies that are well-capitalized, that don't need to raise debt (or equity), and that have above-average growth prospects are the place to be.  We might view the recent strength in the NASDAQ as a heads-up with respect to these investment themes.

Disclosure:  I own several NASDAQ-listed stocks - for a complete disclosure, visit my website

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This article has 4 comments:

  •  
    Aug 11 12:49 PM
    Good charts, thanks for posting the 35 year! B2B efficiency technology companies are the ones to look at. Advertising will be wonderful but don't expect any sustained moves until middle or late next year. Companies that buy ads are migrating en masse online or just say doing more mass marketing but first they must retool and companies marketing models are broken and lack of qualified, economic 101 marketing managers are in short supply. I am in Consumer Healthcare Direct-to-Consumer-Adv... and Higher Education DTCA. I will refrain from other comments based on my positions.
    Reply
  •  
    Aug 11 12:55 PM
    Are you guys doing anything with digital billboards (i.e. DAKT)???
    Reply
  •  
    Aug 12 08:25 PM
    Good charts and good reasoning, though I am married to the SPY. Always had an affection for the younger cube. Perhaps a 50/50 mix of QQQQ and SPY might be in order.
    Reply
  •  
    Aug 12 09:09 PM
    I can make the case for the NASDAQ continuing to lead the way, but it could go either way. I think the strength there bodes well for the whole market. I don't expect Financials to lead the way, so that could hold back your SPY a little. Energy too probably won't lead. In my own holdings and in my model portfolios, my largest overweights are actualy Industrials and Consumer Discretionary.
    Reply
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