Here’s the basic premise …. Although the New York Stock Exchange is the oldes and best known of the stock market trading centers, trading takes place in significant amounts in other areas: the Nasdaq, or over-the-counter, market; the America Stock Exchange; third markets, where off-the-floor trades take place; various optior exchanges; other regional stock exchanges; and so forth.
The New York Stock Exchange Index and the Nasdaq Composite Index each no 1 includes more than 3,500 separate stocks, traded on the New York Stock Exchang floor and within dealer networks, respectively. The New York Stock Exchange often referred to as the “senior” exchange, partly because it has been the longel established and partly because companies listed on that exchange tend to be amon the largest and most established corporations in the country.
Nasdaq, which has lower standards for listing than the New York Stock Exchange, used to be thought of as an area for only smaller, speculative companies. Although stocks of that type continue to be found in this trading sector, more recently, major companies such as Microsoft and Intel, among others, have chosen to remain on Nasdaq rather than seek a listing on the New York Stock Exchange. Some companies consider jointly listing on both Nasdaq and the New York Stock Exchange. Some of the most exciting and fastest-growing technology, health-related companies, and Internet corporations are now traded in the over-the-counter markets. Although the number of Nasdaq’s larger companies listed is increasing, Nasdaq-listed companies, as a group, tend to be more speculative, more technology oriented, and smaller in size than those listed on the New York Stock Exchange. The total daily trading volume on Nasdaq, however, now regularly surpasses the daily trading volume on the New York Stock Exchange.
The Nasdaq Composite Index and the New York Stock Exchange Index tend to be closely correlated in the direction, if not the extent, of their price movement-not perfectly correlated, but essentially so. Given the higher volatility of the Nasdaq Composite Index, its tendency to rise and fall at greater velocities than New York Stock Exchange-oriented indices, such as the Standard & Poor’s 500 Index or the New York Stock Exchange Index, we can readily understand that during most periods of market advance, the Nasdaq Composite Index (an average of all stocks on Nasdaq, weighted by corporate capitalization so that larger companies count for more than smaller companies) is Likely to outperform the less volatile New York Stock Exchange Index (a capitalization-weighted index of all listed stocks on the New York Stock Exchange), if for no reason other than its generally higher velocity of price movement.
The Nasdaq Composite Index tends to rise and fall at rates that are between 1.5 and twice that of the New York Stock Exchange Index. The Standard & Poor’s 500 Index, which includes issues that are listed on Nasdaq as well as the New York Stock Exchange, is more volatile than the New York Stock Exchange Index and less so than the Nasdaq Composite Index.
Similarly, the Nasdaq Composite Index is likely to decline more rapidly than the New York Stock Exchange Index during declining market periods, again as a result of its greater volatility, if for no other reason.
Volatility aside, relative strength relationslups between the Nasdaq Composite Index and the New York Stock Exchange Index are often affected by the nature of public sentiment regarding the stock market. When investors are optimistic about the economy and stocks, they are more likely to place capital into speculative growth companies and to take risks with smaller, emerging corporations and technologies. When investors are relatively pessimistic regarding the economy and stocks, they are more likely to concentrate investments into more established, stable, defensive corporations and to seek out dividend return as well as capital appreciation.
For whatever the reason, and there are no doubt many, it has generally been the case historically that the stock market produces greater gains during periods when the Nasdaq Composite Index leads the New York Stock Exchange Index in relative strength. That’s true not just of the Nasdaq Composite Index. The New York Stock Exchange Index, the Dow Industrials, and the Standard & Poor’s 500 Index all tend to perform best during periods when the Nasdaq Composite Index leads the New York Stock Exchange Index in relative strength. This is not to say that conditions are necessarily bearish when the NYSE Index leads in strength. Market action has typically been neutral when the NYSE Index outperforms the Nasdaq Composite Index. There are winning periods when the NYSE leads in relative strength.
However, these also tend to be the periods when most serious market declines take place. Investments made during periods when the NYSE Index leads the Nasdaq Composite Index in strength are likely, on balance, to more or less just break even.