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Relationships of Price Movements on NASDAQ and the New York Stock Exchange

Stocks on NASDAQ tend to move more rapidly than stocks on the more conservatively oriented New York Stock Exchange, so the NASDAQ Composite itself is approximately usually 125% to 150% as volatile as indices such as the Standard & Poor’s 500 Index. Given this higher volatility, it is not surprising that the NASDAQ Composite often (not always) rises more rapidly than the New York Stock Exchange Index (a weighted average of all stocks on the New York Stock Exchange) when stocks are favorably trended and falls more rapidly during less-positive periods.

In addition, when investors are most optimistic, they are more likely to invest in speculative areas. When investors are most negative, they tend to turn to more defensive and conservative stocks.

For whatever the reasons—and there may be many—the stock market has tended to perform better when the NASDAQ Composite is leading the New York Stock Exchange Index in relative strength and to perform less well when the New York Stock Exchange is leading in strength. It is not only the NASDAQ Composite that performs best when the NASDAQ is leading in relative strength; the New York Stock Exchange Index produces improved profit/loss relationships during such periods, too. Figure 1-4 illustrates these observations.

Figure 1.4

Figure 1-4 The NASDAQ Composite/New York Stock Exchange relative strength indicator, 2002–September 2005.
The price movements of both the NASDAQ Composite and the New York Stock Exchange Index have tended to show rising prices during periods that the NASDAQ Composite leads the New York Stock Exchange in strength and to decline when the relative strength indicator suggests that NASDAQ is the weaker market sector.

The stock market does not necessarily decline in price when the New York Stock Exchange Index leads the NASDAQ in relative strength. There are times when stocks advance, nonetheless. However, on balance, net gains take place when NASDAQ leads, again not just in NASDAQ but in other market sectors, too.

The NASDAQ/New York Stock Exchange relative strength indicator is designed to help investors identify in an objective manner periods in which NASDAQ is leading in strength (and therefore periods when the stock market is most likely to succeed).

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