Below is a chart of the Nasdaq-100, a very long-term, since 1986. Now this index can be bought through the well-known QQQ, but until 1999 this ETF did not exist. Therefore, to get a wider picture, today we use exactly the index. Why is the Nasdaq-100 interesting? Because in a strong bull market, it plays a leading role in relation to the broad stock market, as it is far outweighed in the direction of the Technology sector (out of the top 15 positions 13 belong to either IT or the Internet).
The top of the chart is the price with a 200-day average. The price is shown on a logarithmic scale so that it is more clearly visible how the direction of dynamics and the growth rate of the index have changed. At the bottom of the graph is a simple indicator showing the deviation (in%) of the price from the 200-day average.
What caught our attention? The fact that after the collapse of the dot-com bubble in 2000, this price deviation from the 200-day period never exceeded the range of 15-17%. It doesn’t matter how strong the price rally was, and it doesn’t matter if the market is in a bearish or a bullish mode. Even in the current super-bull market, if we count from the 2009 lows, the price 4 times (they are marked by arrows) was torn off from the 200-day average by a maximum of 17%, followed by a pause or rollback to the average. Now it’s just the 5th time, if you count from 2009, or the 8th time, if you count from 2000.
It is likely that the ability (or inability) of a price to break away from its long-term average by a maximum value over 20 years may become (or, accordingly, not) a signal to replace an already strong bullish regime with a mode of even greater acceleration. Perhaps it will be the last stage of this mega-bull cycle, but it can last a few more years.
Such an example has already been in the history of the Nasdaq-100. By mid-1995, the index had also been in a healthy bull market for a long time (with corrections, but nonetheless). And all this time, the maximum price gap from the 200-day average also rested in a certain zone. Then it was 23-25% (three red arrows on the left). But then in mid-1995 something happened, and the price exceeded the 200-day period at some point by 30% (breakout on the chart). Perhaps this is a coincidence, but it was then that this crazy parabolic growth began, which eventually led to the appearance of the dot-bubble. The change of mode from «normal growth» to «acceleration» is clearly visible with the help of blue arrows indicating the slope of the index curve.
Ultimately, this parabolic growth ended in collapse and a 75% drop in the index. But before that, it lasted as long as 5 years, and this is a lot. And, in our opinion, the first signal for a change in the market regime to «acceleration» was precisely the greater separation of prices from the long-term average. It’s like a sprinter runner who trains for a long time and can’t run a 100-meter faster than 10 seconds. And then suddenly something happens, he runs out of them, begins to constantly improve the result and wins the Olympics.
Whether it will be the same this time is not known. Moreover, while the price can not tear itself away from the 200-day more than 17%, and it is not known whether it can. But if it can, and at some point the gap will reach, say, 20-22%, I personally will be very pleased with this as a long-term “bull” in the US stock market. And it will not just please, but will give an occasion for more aggressive long-term rates (higher allocation of the portfolio to stocks, and inside this part of the portfolio to higher beta sectors and names).