Nasdaq’s Next Step?

Yesterday the Nasdaq Composite Index finally crossed a new milestone, closing above the 6,000 level. Many people noted this 1,000 point climb from the 5,000 level was a long and painful slog, taking over 17 years from the peak hit during the bubble.

What can we expect now? LPL Financial takes a look at where the tech heavy index has been and where it’s likely to go.

It was 17 years in the making, but the Nasdaq Composite finally closed above the next 1,000 point milestone level of 6,000. Considering it first closed above the 5,000 level on March 9, 2000, this equates to an annualized price return of 1.0%. In comparison, the record move from 3,000 to 4,000 took less than two months – equal to an annualized return of 555.8%. Many have said tech is in a bubble currently, but a 1% annualized gain for 17 years isn’t what we’d call asset soaring and in a bubble.

Is the Nasdaq really at a record though? Looking at nominal prices, it sure is. But what if we factored in inflation (real prices)? Doing this suggests the all-time record closing price is really 7,196.56 (using March Consumer Price Index data), not the 5048.62 it closed at on March 10, 2000. So in one respect, it’s still another 19.4% away from a “real” all-time high—yet another reason to suggest tech isn’t in a bubble.

The Nasdaq is considered to be a technology-heavy index, but technology actually comprises less than half of the index’s total market value. A purer look at where the technology sector stands relative to historical highs is better seen in the Dow Jones U.S. Technology Index, which is still 8.0% away from its highs set in March 2000. Here’s the catch: A real breakout just took place for tech. However, per Ryan Detrick, Senior Market Strategist, “Tech might feel like a darling sector now, but on a bigger picture view it is important to remember this group lagged for years. One of our favorite charts shows the Dow Jones Technology Index relative to the S&P 500 completing a 17-year saucer bottom* formation, which suggests the tech rally could only be just beginning.”

Tech remains one of our favorite sectors: Earnings are strong, technicals are improving, and valuations are still attractive. Add it all up and even though this group is off to a great 2017, there could be continued outperformance in the future.

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— The Option Specialist

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About the Author: The Option Specialist