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NASDAQ-100 Performance and Relation to Financial Crisis

Below are a few facts about NASDAQ-100 and the more I think about them the more I am convinced that the financial crisis was a gift to the tech market. How else a massive quantitative easing program that would propel the index 475% in the course of about 10 years would be justified, economically, politically or in any other way?

I will refrain from framing any hypotheses as to why Lehman Brothers was not rescued but let to trigger the financial crisis of 2008. Instead, I am looking at the results of the action of central banks mainly, which was a 475% rise in NASDAQ-100 before dividends in the course of 10 years. A reasonable question is this: would this spectacular gain be possible without quantitative easing following a financial crisis?

Unbiased economists attribute the financial crisis to the imbalances caused by the Chinese currency peg to the dollar that resulted in accumulation of huge reserves. Catherine Schenk, writes:

Source: International Economic Relations Since 1945, by Catherine R. Schenk

The “vital exception to the trend” refers to the other countries adopting flexible exchange rates in the 1990s to avoid accumulation of imbalances. According to this perspective, which is the correct one in my opinion, China was the cause of the 2008 financial crisis and specifically the huge imbalances that returned to the US as cheap credit. By the way, the cause of the accumulation of these imbalances, which was the huge trade deficit, has not been removed yet and another financial crisis is possible. But some may be looking forward to another one after seeing the results of the first one. However, the average working family is not in a better position now than 10 or even 18 years ago.

Below is a yearly chart of NASDAQ-100 since 1985. There have been only 5 losing years in a period of 33 years (including this one) and none after 2008.

After the dot com crash and until 2009, or a period of about 9 years, the index was under persistent high drawdown levels, in excess of 80% at times, turning it into a risky investment vehicle. In essence, there was not any advantage in investing in tech market during that period while traditional sectors were fully recovering from the dot com crash. The financial crisis offered an edge to the tech market with a gain of 475% in 10 years as compared to 201% for the S&P 500, both before dividends.

One of the reasons that the tech market attracted huge investment inflows was the realization that the root of the problem, which was the excessive trade deficit, would not be dealt with but instead money printing would convert the imbalances into asset bubbles by maintaining cheap labor and materials flow from the Chinese markets. Companies like AAPL and AMZN were the major beneficiaries of these policies of not dealing with the cause of the financial crisis but instead covering it with more imbalances of different type. But now, after those that orchestrated this policy are gone, the central bank will have to deal with the consequences.

In my opinion, the NASDAQ-100 chart is an ominous sign in itself. It reflects gains from policies that are no longer even remotely sustainable. This macro understanding is necessary even for a quant like me to help decide where to focus the efforts in strategy development. We are working intensively towards refining our long/short strategies that may be the key to survival in the next 10 years. Anything else has little chance of performing well after the coming structural break in the markets.


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Charting and backtesting program: Amibroker

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2 Comments

  1. Mark Turrin

    The only thing that brings markets down is the revelations and perception of glaring structural deficiencies. The herd gets frightened and runs. Cheap and easy mortgages backed with overvalued collateral was the structural defect that brought down Lehman and others. That black swan actually circled overhead for a while. XIV was another. The big question is what's next.

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