Below are the returns for the Nasdaq 100 and Russell 2000 for the last 7 days:
I decided to run some tests to see if I could glean anything from this.
My Russell 2000 data went back to the fall of 1987, so that is how far back I ran the tests. Over the last 20 years I found 10 other instances of 1% or greater divergences of seven days or longer. The most recent occurred in 2001. I then looked to see how the Nasdaq performed over the 20 trading days following an event. The 10 trades are listed in the table below.
What most stood out to me was the size of the returns and the range ((high of 20 days-low of 20 days)/close of day 1) the Nasdaq 100 traded in over the subsequent 20 days. The average winning trade gained 12.8% in the next 20 days. The lone loser lost 18.1%. The average range for the 10 instances was 24.25%, with the smallest range being 14.9% and the largest a whopping 36.5%. Truly eye-catching numbers.
While it’s difficult to draw any concrete conclusions from this study, it appears to me that when major indices diverge this much, something is possibly disjointed in the market. This disjointedness has often corrected itself and led to a multi-week rally. In all cases though, it seems to indicate the market is volatile and is likely to remain that way for a while. This agrees with several of the other studies I have discussed recently. Recall my summary in CBI, Reversal Studies and Bear Market Rallies…
P.S. Per request, I’ve posted a CBI reading on the top right hand corner of the page. I will update there each day until the reading drops back to 3 or below. I will also update intraday should a significant move be apparent.