UPDATE: ETFs are compounding the divergence between the Dow and the Nasdaq-100
By Thomas H. Kee Jr.
Consider a contrarian trade when an index seems to be moving because of one stock
A divergence has recently taken place between the Dow Jones Industrial Average and the Nasdaq 100, and it was compounded by the popularity of market-based ETFs. Investors should be aware of, and prepare for, similar nuances related to ETFs in the future.
Boeing(BA) has dragged the Dow down, while Apple(AAPL) has driven the Nasdaq 100 higher so far this week; this is relatively clear when looking at the headlines too, but the ETF influence is not as clear.
The Dow is comprised of only 30 stocks, and that makes it vulnerable to big declines when one stock, like Boeing, moves down so much so quickly. When this happens, investors shy away from ETFs that are tied directly to the Dow, and when they do that the buying interest in the other 29 stocks falls too.
Purchases of ETFs like the SPDR Dow Jones Industrial Average ETF Trust(DIA) and
This is where the opportunity comes from.
At the same time, Apple is the most influential stock in the Nasdaq-100, which is comprised of only 100 stocks. Therefore, big moves in Apple can have a strong influence on the Nasdaq-100, and that is what happened this week too. Unlike in the Dow, however, it was a positive influence.
The strength in Apple could have influenced additional purchases of ETFs like the
Neither of these markets is as broad as the S&P 500 or Russell 2000 , and it is this finite structure of the Dow and the Nasdaq-100 that allows this ETF nuance to exist. One stock can influence these markets, that's pretty clear, but that influence compounds when it also influences decisions in the Market based ETFs too.
What to look out for
When a market like the Dow moves down aggressively due to news from one stock, and other stocks in the Dow seem to be getting hit simply because they are in the same market as that lame duck, consider a contrarian trade.
Look for stocks that are getting hit simply because they are in the same market, and look for a trade to develop and be fulfilled as the isolated news is absorbed by the market and those stocks that were hit bounce back into parity with where they should be, which is often the case.
Thomas H. Kee Jr. is a former Morgan Stanley broker and founder of Stock Traders Daily (http://www.stocktradersdaily.com/), where he is chief market strategist. He has no positions in any of the ETFs mentioned.
-Thomas H. Kee Jr.; 415-439-6400; AskNewswires@dowjones.com
(END) Dow Jones Newswires
March 14, 2019 20:43 ET (00:43 GMT)
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