Big Gains in AAPL and GOOG, But Nasdaq Breadth Stays Negative

Big gains in Nasdaq heavyweights Apple and Google boosted the NDX to a solid 2% gain on Friday, but the large-cap strength masked weakness beneath the surface. It’s important to pay attention to breadth statistics when the market stages a solid advance. If breadth doesn’t back up the rally, it tells you a small handful of heavily weighted issues accounts for most of the day’s gain. These rallies are particularly susceptible to fail given the absence of broad-based support. Take a look at every instance over the past decade in which the Nasdaq100 (NDX) closed up 1.5% or more and breadth on the Nasdaq exchange was negative (meaning declining issues outnumbered advancers). Out of 17 occurrences, all but one led to a lower NDX one week later, with an average loss of nearly 5%…

NDX +1.5%, Nasdaq Breadth Negative
10/15/10… Nasdaq ??? one week later
09/11/08… Nasdaq -4.3% one week later
01/09/08… Nasdaq -3.9% one week later
08/06/07… Nasdaq -1.0% one week later
03/07/05… Nasdaq -1.9% one week later
07/22/04… Nasdaq -0.7% one week later
01/29/03… Nasdaq -4.7% one week later
07/15/02… Nasdaq -8.0% one week later
07/11/02… Nasdaq -0.3% one week later
07/03/02… Nasdaq +0.2% one week later
06/24/02… Nasdaq -5.6% one week later
06/12/02… Nasdaq -2.3% one week later
06/04/02… Nasdaq -6.6% one week later
04/01/02… Nasdaq -5.8% one week later
03/22/01… Nasdaq -8.2% one week later
03/05/01… Nasdaq -12.3% one week later
03/01/01… Nasdaq -1.5% one week later
02/14/01… Nasdaq -11.9% one week later

Friday’s 2% gain for the NDX also triggered a short-term sell signal given the unusually large outperformance relative to the Semiconductor Index. The SOX only managed a 0.6% gain, less than half of the NDX move, a pattern that typically leads to a lower Nasdaq two sessions later. In the table below is every case since 2000 in which both the NDX and SOX closed up at least 0.5%, but the NDX more than doubled the gain of the SOX. Note that in 21 out of 25 instances, or 84% of the time, the Nasdaq closed at a lower level two sessions later. Only two cases led to a gain of more than 0.5%, while thirteen cases led to a drop of more than 0.5%…

NDX & SOX +0.5% or more & NDX Doubles SOX Gain
10/15/10… Nasdaq ??? two days later
09/20/10… Nasdaq -0.3% two days later
07/23/09… Nasdaq -0.1% two days later
03/31/09… Nasdaq +4.6% two days later (*)
12/08/08… Nasdaq -0.2% two days later
12/02/08… Nasdaq -0.2% two days later
09/11/08… Nasdaq -3.8% two days later
07/25/08… Nasdaq -0.1% two days later
07/08/08… Nasdaq -1.7% two days later
10/05/07… Nasdaq +1.0% two days later (*)
08/24/07… Nasdaq -3.2% two days later
02/27/06… Nasdaq -0.1% two days later
04/25/05… Nasdaq -0.9% two days later
10/18/04… Nasdaq -0.3% two days later
07/27/04… Nasdaq +0.5% two days later
12/01/03… Nasdaq -1.9% two days later
09/18/03… Nasdaq -2.4% two days later
03/25/03… Nasdaq -0.4% two days later
04/08/02… Nasdaq -2.1% two days later
05/02/01… Nasdaq -2.0% two days later
05/01/01… Nasdaq -2.2% two days later
03/27/01… Nasdaq -9.9% two days later
01/23/01… Nasdaq -4.9% two days later
08/24/00… Nasdaq +0.1% two days later
06/30/00… Nasdaq -3.0% two days later
05/05/00… Nasdaq -6.6% two days later

Also interesting to note that Friday’s volume was unusually heavy, with SPY and ES volume hitting their highest levels of the week. Contrary to what you might expect, it’s rare to see the highest SPY volume of the week on option expiration Friday. It’s only happened about 20% of the time over the last decade, and when elevated OpEx volume has coincided with a higher SPY close, the market was lower 2-3 sessions later in 9 out of 10 occurrences since 1997.

Categories : Archived EOD Commentary, End-of-Day Commentary

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