High beta indexes are jumping

Jason Goepfert
2020-06-17
Over the past 3 days, the Russell 2000 has rallied at least 2% and the Nasdaq Composite at least 1%. That has indicated "too much too fast" on a short- to medium-term basis, especially for the broader indexes like the S&P 500. It was mostly a good sign for the Nasdaq, though.

After it looked like the recovery was going to take a break, with large losses last Thursday, stocks have stormed back. Especially some of the higher-beta ones in indexes like the Nasdaq Composite and Russell 2000.

For the small-cap Russell, it just capped off three straight days with at least a 2% gain. That's only happened three other times.

When it triggered during the initial burst from the 1998 bottom, it was a great sign of momentum. The other two times, when the Russell was near its highs, it led to some short-term give-back of the gains, with large losses over the next month.

It was better for the S&P 500, though it also showed a negative return over the next month two of the three times.

The Nasdaq Composite, which contains a large number of technology-related stocks, has also seen a boost over the past few sessions, rising at least 1% each day.

Coming out of the lows in 1982 and 1998, tech stocks continued to roar over the medium- to long-term, though it ultimately gave back much or all of those large gains. The other signals preceded mixed returns. Even so, two months later the Nasdaq showed only a single loss.

For the S&P, it was mostly a good sign, but not nearly as strong as for the Nasdaq itself.

The S&P was higher only 54% of the time two months later. Over the past 30 years, the S&P showed a negative return sometime between 1-6 months later every time but once (1998).

A stretch like this will get financial media excited, while they should have been more impressed by signs of momentum in March and April. This kind of price rise has a mixed record, and can't be considered too much of a positive.

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