Coronavirus Pandemic – Stock Market Milestones: Dow 30K and Nasdaq 12K

Though the major stock indices, including Dow and Nasdaq, fell sharply at the onslaught of the pandemic in March, they have made a spectacular turnaround since then, hitting new all-time highs. Dow reached a historic 30,000 milestone while Nasdaq crossed 12,000. 

After swooning to 18,592 on 3/23 from a February high of 29,551, Dow continued its steady upward swing until 9/1 when it hit 29,101, coming very close to the previous high. It went through a mini-correction in September, falling to 26,763, creating a good re-entry opportunity for the new investors and those who buy the dips. On 11/16, when Pfizer announced its awe-inspiring Phase-3 vaccine results, the index eclipsed the February high, and on 11/24, it crossed the historic 30,000 marks and recovering 11,454 from the March lows.

Though the Nasdaq's story has been similar to that of Dow -- plummeting in March as the pandemic gained momentum -- it has shown more strength since the beginning of the recovery, trending more linearly than the Dow.  For instance, on 6/18, Nasdaq surged past the February high of 9,817 and hit 12,056 on 9/2, making a historic comeback and achieving such momentous feats well ahead of Dow.  

The above regression scatter shows how Nasdaq had outperformed Dow after the intersection point of 26,000 and 9,500. To put it in proper perspective, during the recovery period between 4/1 and 11/25, Dow has bounced back 32%, while Nasdaq has jumped 53% -- a stunning 20% spread, which is why the r-squared value has been a moderate 0.588, rather than the usual lockstep value of 0.90 and above.

Here is a look at the market achievement from a more humane perspective: The pandemic made the rich significantly richer, while the poor further regressed with more all-around devastation, paving the way for a more rapid widening of the ever-expanding wealth gap.

To save the poor and middle-class from the cyclical downturns and future calamities, we need to introduce Universal Basic Income (UBI) as soon as possible so that they can also cheer the Dow 40,000 in chorus. Right now, they are just silent spectators, worrying about money for rent and utilities. Worse yet, in poorer countries, millions of children are going to bed hungry while their mothers are starving.

What a spectacular achievement!

Stay safe!

-Sid Som

homequant@gmail.com

Coronavirus Pandemic – How Nasdaq has Outperformed the Dow during the Pandemic

(Click on the image to enlarge)

Highlights...

1. The top graph demonstrates that after bottoming out on 3/23 at a closing price of 8,592, the Dow Jones Industrial Average (Dow) made an unexpectedly momentous reversal. While its growth started to taper between 6/10 and 7/10, it resumed its upward movement gradually. But it has yet to re-test its prior high of 29,551 set on 2/12. Nonetheless, the Dow has jumped 50% between 3/23 and 8/10.

2. The bottom graph shows that Nasdaq also hit bottom on 3/23 at a closing price of 6,861. However, unlike the Dow, it continued its majestic run, even far exceeding its prior all-time high of 9,817 set on 2/19 and recently eclipsing a short zenith of 11K. The trend has been a near-perfect 45-degree linear -- an impressive performance indeed. Between 3/23 and 8/10, Nasdaq has skyrocketed 60%, an even better feat than the Dow.

(Click on the image to enlarge)

3. The above scatter plot shows that Nasdaq had outperformed the Dow after the two indices started forking in mid-June when the Dow and Nasdaq were roughly 24,600 and 8,900, respectively. After the fork, the Dow began to taper while Nasdaq continued its eye-popping journey.

4. Generally, these two indices more or less move in tandem, but this fork -- resulting in two different slopes --was significant, leading to the low r-squared value. The slope of the Nasdaq index became exponential, while the Dow fell into a logarithmic model, slowly tilting down.

The market reversal after the historic fall in March was just terrific.

Stay safe!

Data Source: Yahoo Finance

-Sid Som
homequant@gmail.com

Link to Sid's Books

Coronavirus Outbreak – How Smart Program Trading has Saved the Stock Market during Pandemic

Today, trading and investing are almost mutually exclusive. Trading has taken over the day-to-day market, leading to the extreme volatility (wild swings, sky-high volumes, etc.) that we have been seeing since the closing stages of the last recession.

When it comes to the lion’s share of today’s trading, it’s largely controlled by the “smart” program trading, driven by sophisticated algorithms (Math/AI models). Generally, 30 to 50 major financial services companies (hedge fund, brokerage, private equity, etc.) heavily depend on smart program trading. These models decide the daily swings of the market.

In its infancy, program trading was essentially just high-speed trading. Today, with the integration of AI, etc., it is much smarter and more predictive. Of course, the tremendous volatility it adds to the market may make small investors extremely confused, often forcing them back to good ole’ Mutual Funds as their preferred investment vehicle.

When the models are in tandem, the market generally stays up all day long; when they are in conflict, some wild swings come into play. Obviously, the news and events of great economic or political consequence (e.g., the announcement of lockdowns, stimulus payments to consumers and businesses, May employment report indicating the reversal of job trend, etc.) heavily influence those models. Of course, while the other professional day traders play along with the trend, they hardly influence the direction of the market anymore, contrary to the conventional wisdom or belief.

What the media won’t tell you is that today's smart program trading also helps create meaningful floors to the market. Without the smart program trading in place, a once-in-a-century pandemic would have pushed the Dow average down to 5,000 – instead, it bottomed out at 18,000 in March.

When the averages temporarily hit top or bottom (due to overbought or oversold condition), smart program trading offer better signals, thus allowing savvy traders renewed entry and exit opportunities periodically (of course, they do not necessarily exit the market; they simply overweight on the short side when the exit signals start to flash). 

The stock market, therefore, is not necessarily the leading indicator of the economy anymore (that could very well be an old economic theory, but we have to wait a little longer to recognize if trading has dethroned investing).

-Sid Som

homequant@gmail.com

Coronavirus Outbreak – NASDAQ Ignores Pandemic and Makes New All-time High Reaching 10K Marks

(Click on the image to enlarge)

The tech-heavy NASDAQ, along with the other broader market indices, has been on a tear since bottoming out on 3/23. Though all three major indices -- Dow, NASDAQ ("index") and S&P 500 -- have moved in tandem, the index managed to reach the finish line first. Today (6/9), the index not only made an all-time high, but also reached a new milestone of hitting the 10,000 mark. 

It is almost astonishing that the index would marshal such firepower amid a once-in-a-century pandemic. This is truly something to write home about.

Highlights...

1. Before the onslaught of the pandemic, the index made a new high of 9,838 on 2/19. However, on 2/25, the CDC alerted the American public for the first time to prepare for an outbreak in the US, causing massive panic among the general public and businesses. Consequently, the index remained in a free-fall for the next three weeks.  

2. On 3/23, all three indices hit the bottom. After hitting an intra-day low at 6,631, the index quickly reversed trend and started shooting up, quickly hitting an intra-day high at 6,985 and closing well above the low at 6,861. As the top chart shows, since that day, the index continued a sharp V-shaped recovery until today, reaching that marvelous feat. Though Dow and S&P 500 closed down today, the index closed in the positive territory with a 29-point gain.

3. Of course, between 3/23 and 6/9, there were days when the index closed down, but there was only one occasion when it closed down two days in a row (5/12 and 5/13). All other down days were followed by up days, meaning the index closed in the green. In fact, the index closed up with at least 200-point gains on eight occasions and on two occasions it returned 190+ points. On the other hand, it closed down with 200-point losses on only four days.

4. As the index started closing in on the 10K milestone, the excitement skyrocketed, as evidenced by the spike in volume (the volume chart). In the last four days, the daily volume jumped to 6B, from the prior average of 3.52B. Of course, during the period of panic, the index did register 5B volumes on three occasions. This demonstrates how fear and excitement tend to impact both price and volume in the market.

5. Amid all this excitement, there is some built-in sadness. During this period, millions lost jobs so they were unable to participate via the 401(K) which -- for the 99% -- is one of the most common ways to participate in the market. Also, in order to cope with the fallout from the pandemic, many businesses, especially the hardest-hit dining and retail sectors, have either totally eliminated or reduced 401(K) employer matching, somewhat denting the incentive for those otherwise unaffected by the mass lay-offs.

Anyway, it was a historic day for the index while we look forward to similar milestones for Dow and S&P 500 in the days to come.  

Stay safe!

-Sid Som 
homequant@gmail.com