June 28th, 2012

Follow the Leader: S&P 500 vs. Nasdaq Composite

The big build-up for the Supreme Court decision on Obamacare turned out to be a big dud (from the stock market perspective, that is).  The decision came, the market reacted for most of the day and, then, at 3:30 some new rumors concerning the European meeting this weekend surfaced and the market did a 180° turn and wound up the day nearly flat.  So the Talking Head’s discussions about how a court decision would bring certainty to corporate CEOs and finally encourage them to start hiring turned into a discussion about how it’s really uncertainty concerning the financial cliff, uncertainty about the future of the Euro, lack of transparency about the business prospects for the remainder of the year, yada, yada, yada.  I can’t hope to try to sort all that out and don’t want to pretend, like they do, that I do have it all figured out.  All I hope to be able to do is to try to remain nimble enough to perceive in which direction the majority seem to be leaning and, when the a trigger is pulled to launch some directional momentum, to climb on board for the ride.

For the past couple of days, one of the recurring themes seems to be that money is flowing into dividend and defensive stocks and out of tech and other growth areas due to what some have now discovered to be the leading edge of a world-wide recession, close to a world-wide depression.  I notice that the tech stocks in my portfolio, the stocks that had accounted for much of my Portfolio’s gains during the first half now seem to be lagging so,of course, the Talking Heads no say that tech does and will continue to suffer from the “world-wide recession”.  So I decided to step back and take a longer-term comparison of the Nasdaq Composite relative to the S&P 500 (click on image to enlarge):

True, the Nasdaq composite has diverged from the S&P 500 at different times but, over a nearly four year comparison, the similarity of the two indexes has been incredibly close.  If anything, the Nasdaq has been slightly more volatile of the two as to be expected.

This comparison drives home the truth of Benjamin King postulated in 1966, a principal that has been a core of my portfolio management philosophy for many years:

“50% of a stock’s price movement can be attributed to the overall movement in the market, 30% to the movement in its sector and only 20% on its own.”

Should I follow the Talking Heads and move money from tech stocks to more defensive stocks?  Probably not because if the market continues to correct tech stocks will too but if the market finally successfully crosses above the 1360-1365 zone of resistance then Nasdaq stocks will zoom higher.

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