For the third consecutive month, the indices all scored major gains. The Dow rose 4.4%, the S&P500 saw a 5.1% increase, while the Nasdaq raced ahead 9.0%. This marked the 6th up week out of 7 for the SPX and the Nazz.
The Rally continues to show impressive resilience, as internals remain strong. The potential negatives are the deteriorating sentiment data, the speculation in internets and bio-techs, and the continued issue of valuation. Meantime, the trend remains your friend, and until it reverses you should assume the path of least resistance is up.
One curious element of this rally has been the lack of leadership shown by some of the “Generals,” i.e., GE, MSFT, BAC, IBM, C or PFE. Compared to the Nasdaq, the Dow Jones Industrials have been downright soporific.
The relationship between the more conservative blue chip index and the more aggressive, tech heavy Nasdaq is shown in the chart at right. Over the past 3 years, the “spread” between the Dow and the Nadaq has fluctuated widely; At times, the Dow has been 7 times the point value of the Nasdaq (at last Summer’s lows), and as low as just over 2 times Nasdaq (pre-Sept 11th).
There are several interpretations of the data: Since the bubble was primarily in tech, telecom and internets, it makes intuitive sense that immediately after the April 2000 crash, the Nasdaq would still retain a relatively large percentage of the Dow (in points).
As the sell-off accelerated over the next 3 years, that percentage fell, until last July and October, when the Nasdaq was barely over 1100. At that point, the multiple between the two indices was 7 X – it’s widest since 1990 when it was 7.4. As evidenced by the ensuing rally, investors have (obviously) found the Nasdaq attractive relative to the Dow at those levels.
Since 1981, the relationship between the two has averaged 5.03; Its currently at 5.54. Look for the Nasdaq to decelerate as it approaches the historical average of 5. While an overshoot below that level is possible, I would expect to see some Nasdaq consolidation – or Dow catch up – at price levels near that multiple. If the Dow reaches 9000, that implies a Nasdaq near 1800 . . .
Chart of the Week
Over the past 3 years, the ratio of the Big Cap Blue Chips in the Dow has traded at varying multiple to the tech-laden, more speculative issues on the Nasdaq.
Ratio of Dow Jones Industrials to Nasdaq
Chart courtesy of StockCharts.com
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