What Happens When the Nasdaq Leaves the Dow in the Dust?

The Dow Jones Industrial Average (DJIA) is on pace to close out the first quarter with a healthy 4.9% lead, but is on track to finish the month of March 0.7% lower. While blue-chip stocks have slumped in recent weeks, however, the tech-heavy Nasdaq Composite (COMP) has managed more gains, on pace for another record closing high today, and bringing its month-to-date lead to 1.7% -- a 2 percentage point lead over the Dow. We asked Schaeffer's Senior Quantitative Analyst Rocky White what happens to stocks after these two indexes see such a large divergence. The table below shows every instance since 2010 when the Nasdaq has outperformed the Dow by at least 2% on a monthly basis.

A Look at Dow And Nasdaq Returns After a Divergence

What we want to know now is what happens to stocks in the following months. Does the Dow bounce back or does the Nasdaq continue to outperform? The tables below show 1-, 2-, 3-, and 6-month returns for each index after each of these divergence signals.

Dow Returns Could Lag Before Coming Back Stronger

To break it down a little more clearly, we took a look at average post-signal returns over the same periods. For the Dow, the following two months generally see slightly lower returns after being outperformed by the Nasdaq, compared to anytime returns. But by three and six months, the large-cap index begins giving slightly better-then-average returns. Plus, standard deviation is slightly lower after a signal, suggesting less volatility for stocks.

Nasdaq May Be Set to Keep Outperforming

As for the Nasdaq, it looks like one month of outperformance may beget even more. At every period up to six months after a signal, the tech-heavy index beat its anytime returns. And like the Dow, the Nasdaq saw somewhat lower standard deviation over each time frame, as well.

Low Volatility Could Persist as Stock Rally Continues

This divergence between Dow and Nasdaq monthly returns certainly don't bode poorly for the market. If anything, it may suggest our ongoing streak of historically low volatility is destined to continue for some time yet.

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