Nasdaq Leading S&P 500 and Dow Jones

Nasdaq Leading S&P 500 and Dow Jones

Posted on April 02, 2019
Market State 1 (Bullish) – The S&P 500 is in a Bullish Market State following the substantial run-up in the markets we have seen to start the year. Canterbury studies have shown that Bull markets have limited risk of about 8-12%.  This bull market comes after roughly 4 months of a Transitional Market State with high volatility.
Canterbury Volatility Index 67 Day - (CVI 74) – Volatility, as measured by the Canterbury Volatility Index (CVI) remains in the mid-70s.  CVI was as high as CVI 129 to start the year.  Since then, volatility has fallen substantially, turning Canterbury’s volatility indicators positive.
It was mentioned 2 weeks ago, but the Nasdaq is outperforming the S&P 500 on a relative basis.  Coupled with that fact, the S&P 500 is leading the Dow Jones.  Historically, it is a good sign for markets when the Nasdaq is leading the S&P and the S&P is leading the Dow. 
Canterbury Analytics Group performed a study, dating back to the start of 2000 (4,840 trading days) that focused on the effects of the Nasdaq leading the S&P and the S&P leading the Dow. The parameters for the test were as follows:
  • Date range: 1/3/2000 – 3/29/2019 (4,840 days)
  • ETFs used: SPY (S&P 500), DIA (Dow Jones Industrial Average), QQQ (Nasdaq 100)
  • Relative Strength Indicator Used: Canterbury’s Volatility-Weighted Relative Strength (VWRS)
  • Positive: VWRS of Nasdaq > VWRS of S&P > VWRS of Dow
  • Negative: VWRS of Nasdaq
  • Else (ex: S&P > Nasdaq > Dow): Same as the period prior
Canterbury Analytics Group used Canterbury’s proprietary VWRS indicator to conduct the test.  Volatility-Weighted-Relative-Strength accounts for a security or index’s strength per unit of volatility.  In other words, it is a risk-adjusted relative strength. The Chart below displays periods where the Nasdaq led the S&P, which led the Dow (in Blue), and periods when the Dow led the S&P, which led the Nasdaq (in Red).  If there was a period where neither one of those two conditions were true (example: S&P led both other indices), then that period was assigned whatever the prior period was (so, if the Nasdaq was leading both other indices before, then that period is shown in Blue).

From the chart above, we see that when the Nasdaq maintains leadership over the S&P 500 and the S&P has leadership over the Dow, the market has a higher likelihood of experiencing a run-up.  On the other hand, there are a few examples in the chart, where at market peaks, the Dow is leading the S&P which is leading the Nasdaq.  This occurs right before a drop in the markets.  The risk reward metrics (using daily data) for both periods are as follows:
  Nasdaq>S&P>Dow Dow>S&P>Nasdaq
Annualized Return 7.87% 2.88%
Annualized Risk 17.42% 20.75%
The table above shows that when the Nasdaq leads the S&P, which is leading the Dow, the market has a higher probability of returns with less risk.  This, however, is not an “end all, be all” indicator for the markets.  There are a few substantial runs when the Dow is showing leadership, as well as a few substantial declines when the Nasdaq is showing leadership.  This is just an observation being made.  It is usually better for the market when the Nasdaq is leading the S&P 500 and the S&P 500 is leading the Dow Jones.

Bottom Line

The Stock market has rallied substantially off its December low.  Throughout the rally, volatility (CVI) has declined and the market is starting to behave more rationally.  The Nasdaq leading the S&P and the S&P leading the Dow is historically a good sign for markets, as it shows that investors are willing to take on more “risk.”

The further we get from December, the easier it is to forget.  Many investors experienced a wide range of emotions that may have caused them to make poor investment decisions.  Having an Adaptive process, like the Canterbury Portfolio Thermostat, allows us to navigate all market environments, bull or bear, and make the necessary adjustments needed as market environments begin to shift.
Canterbury Investment Management: Tom Hardin

More About Tom Hardin

As Chief Investment Officer, Tom has more than 30 years of experience in the investment management industry and has a broad breadth of knowledge. He is known as an innovator, educator and has been revolutionary in the advancements of portfolio and risk management.

Every effort was used to provide accurate data and mathematical calculations to provide, what we believe to be, accurate results. Canterbury Investment Management, LLC, and its principal owners, make no guarantee of completeness or accuracy of data or calculations as well as conclusions of any statistical data or information contained in the simulation illustrated on this page. Past results or performance is in no way a guarantee of future results.