Nasdaq Knockdown: How Bad Is It?

The Nasdaq has been walloped of late, in case you hadn’t noticed.

After being untouchable last year, it is unwatchable this year, down 15% from its December high. Many see this as a long-awaited bubble prick, and can’t wait to see Amazon.com and Facebook engineers see their millions in stock options turn to dust. But is it really so bad?

No, it’s not actually too bad so far. It’s just that it has been really fast. As you can see in the chart below, created by Jason Goepfert, of Sundial Capital, past blood-letting went much further.

The chart shows how much the Nasdaq Composite index lost from its highest point in the past year. Three times since the index’s inception in 1971, it surpassed –50%. Tuesday’s selling pressure took the index through the –15% threshold. There have been 18 declines of –10% in the Composite since 1971. Of those, nine stopped before reaching –20% (averaging –17%), six of them stopped before reaching –50% (averaging –29%) and three of them went beyond –50%.

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This suggests that the posture of the index is about in line with the average serious correction. What’s outstanding about our current situation, though, is how quickly it unfolded, Goepfert notes. It was not even 30 days ago that the Nasdaq Composite was within spitting distance of a multiyear high. The arrows on the chart highlight every time that the Composite fell at least –15% from its highest point in the past 30 days, and that point had been within 3% of a 52-week high.

The biggest worry has been that we’re seeing a repeat of something like 2000 or 2008, and indeed this kind of decline was seen as technology topped in 2000. The 2008 peak didn’t trigger selling pressure as fast as this one has. We’re conditioned to pay the most attention to the most recent occurrences, so it’s natural to anchor on that 2000 instance. It wasn’t pleasant, as tech stocks never really got a break from the selling pressure for a few weeks after the correction passed the -15% threshold, Goepfert observes.

There is an unfortunately small sample size of occurrences, but other than 2000, there were six others. As you can see from Goepfert’s table, above, further selling pressure was the norm rather than the exception, at least in the shorter term. Two weeks later, the composite had managed to rally only once and that was weak. It got better the longer out we look. By three months later, all but two were positive, and by six months later the only failure was 2000, reports Goepfert. The others were so positive that even including the 2000 failure led to an average return that was far above random, the data shows.

Bottom line: Even if we’re in the midst of a typical correction, when we’ve seen this kind of swift, severe pullback, there has usually been some testing over the next few weeks before the long-term uptrend resumed.

DAZE OF OUR LIVES

If it seems like the first paragraphs of my dispatches have seemed very similar in the past six weeks, you may be onto something important. Almost every day this year, the market has started with a downbeat, worsened during the next five hours, then lightened up a bit in the 45 minutes before cratering again at the end.

Analysts at Bespoke Investment Group noticed the same thing, and put together a composite chart of the S&P 500 Index’s intraday action during the market’s steep downtrend. The chart below shows what the average trading day has looked like so far this year for the S&P 500 using minute-by-minute prices.

The Bespoke analysts note that the benchmark index has started the trading day in the red by more than 0.10%, and from there it continues lower all day up until roughly 2 p.m. Eastern time. Through 2 p.m., the S&P 500 has been down an average of 0.60% on the day. That’s a lot, because the average for all days in the past 50 years in that span is in the range of +/- 10 basis points. As you can see, 2 p.m. has been the low for the day, however, as buyers have stepped in to bid the market higher until there are about 15 minutes left in the day, the analysts report. From there, the sellers have taken back over into the close.

Overall, the average trading day has seen a decline of roughly 0.40% this year, Bespoke concludes. If you’re going to see buying, you want to see it in the final hours of trading. But that buying has not been enough to erase massive declines that the market has seen over the first four and a half hours of the trading day — and has left the benchmark index down 10% year-to-date.

Best wishes,

Jon Markman

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