Wednesday, June 23, 2010

Why the Nasdaq isn't tracking the S&P 500 and the Dow this past year.

I wrote on Tuesday, June 21st, that the Nasdaq has not followed the other Indexes in terms of the slant of the "W" pattern and it was slanting up, rather than down like the other Indexes for the same time period. I didn't understand why as it didn't make sense. I even proposed a scenario that said the Nasdaq might drop more than the other indexes to correct this discrepancy. However, today an article in Seeking Alpha reports the fact that Apple, Inc. now represents 20% of the Nasdaq 100, which might have a similar impact on the Nasdaq Index and account for the discrepancy. It could be that when markets drop it might be that Apple will be hit more than the other stocks. Remember that when the market was testing Dow 6,400, Apple stock was at $76/share. It is now 270/share. Here's the article by Bespoke Investment Group:

"With shares of Apple (AAPL) rallying even as the overall market remains weak, the stock's weighting in the NASDAQ 100 is beginning to make a mockery of the index. Believe it or not, AAPL now has a 20% weighting in the index. No, not even AAPL has rallied so much that its market cap actually accounts for 20% of the NASDAQ 100's market cap (although it does currently have the highest market cap in the index). The reason for the large weighting dates back to the creation of the index when the market cap of Microsoft (MSFT) dwarfed the rest of the stocks listed on the NASDAQ. Back then, in order to avoid making the NASDAQ 100 an index dominated by MSFT, they had to arbitrarily lower MSFT's weighting and raise the weighting of the rest of the stocks in the index.

Today, the NASDAQ 100 is increasingly becoming an index of Apple (AAPL). At current levels, AAPL's weight in the index equals the combined weight of MSFT, GOOG, QCOM, ORCL, CSCO, and INTC! Given that MSFT's weight was once adjusted so that it didn't dominate the entire index, some would say that it's time for the NASDAQ to adjust the weightings again so that AAPL doesn't dominate the index now. However, according to NASDAQ's methodology (pdf) for the index, AAPL's weighting in the index won't be up for review until its weight reaches 24% of the index or more."

Now that makes sense as to why the Nasdaq has not performed similarly as the DOW or S&P 500 Index as well as the Russell 2000 Index. Let's see what actually happens.

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