There is a love affair going on in the markets – investors are enamored with the mega-capitalization stocks that comprise nearly half of the index weight of the Nasdaq 100 Index (NDX), pushing that measure to an all-time high. The affection is not irrational since those stocks have continued to outperform the broader S&P 500 (SPX) by a considerable margin. I’ve written about that outperformance, along with my concerns that the long-term NDX chart has gone parabolic. Yet many of our readers are traders. Today’s findings may be more relevant to them.

Put simply, NDX has been outperforming SPX on the downside as well as on the upside. On down days, the percentage decline in NDX has been smaller than that of SPX. This reinforces the concept that NDX is a relative safe haven. Yet this phenomenon is relatively recent and has taken on greater importance in recent weeks.

It struck me yesterday, as it did on other days when markets declined, that NDX outperformed SPX yet again. I couldn’t remember the last time that NDX fell more than SPX. So I did a little research and discovered that the last time that happened was on June 4th, roughly 3 weeks ago. In fact, there have been only 4 down days in NDX this month compared with 7 for SPX. Looking back further, there were only 4 times in each of April and May when NDX fell more than SPX on a down day.NDX had 7 down days in May and 8 in April, while SPX had the same 7 in May and 10 in April. 

Another way to think of those results is that in the prior two months, it was relatively random whether NDX would outperform SPX on a down day, in recent weeks it has become quite rare. To be fair, we are dealing with very small data sets, so the effect may be somewhat random in itself. So I looked at larger data sets: one year, year to date, and one year ago until the end of last year. Here are my findings:

(Click on image to enlarge)

This shows that over the past year, NDX and SPX were about equally likely to decline on any given session, and NDX was slightly less likely to underperform on any given day. Note the change in the two rightmost columns, though. Prior to the end of 2019, NDX was more likely to underperform SPX on a down day. Since the calendar turned, however, NDX has become less likely to underperform on a down day. And as we’ve seen, it has become especially rare this month.

The relative safe-haven status has ramifications for volatility traders as well. Consider the following chart, which plots the CBOE Volatility Index (VIX), the CBOE NDX Volatility Index (VXN) and the spread between the two indices from the date at which the current calculation methodology was standardized:

VIX, VXN and their Arithmetic Spread (VIX – VXN)

(Click on image to enlarge)

Source: Bloomberg

Over the course of these indices’ existence, it has been very unusual for VIX to exceed VXN for extended periods. Furthermore, each of those periods have been somewhat unusual for the markets, coinciding with spikes in both volatility measures. Late 2008 to early 2009 was the only period where VIX exceeded VXN while both measures were receding. Then as now, there was an unprecedented bout of combined monetary and fiscal stimulus in response to a significant crisis. And the current crisis saw record differentials between the two measures, exceeding those of the early 2018 “volmageddon”.

When I see the parabolic rise in NDX displayed in the chart below along with the VIX-VXN chart above, I must question the sustainability of the idea that the Nasdaq mega-caps are a bastion of safety. Their steady revenues and growth prospects have indeed commanded very high valuations. The safe-haven status can persist for as long as investors continue to pay a significant premium for the largest names. 

But markets are fickle and history tends to at least rhyme, if not repeat. Investors should question whether the current narrative about the NDX’s safe-haven status is sustainable over the coming weeks and months.

(Click on image to enlarge)

Source: Bloomberg

Read more of Steve’s Thoughts on This Topic Here:

Does This Look Like the Chart of a Safe Haven to You

A Fascinating Anomaly