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mortiz

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Reply with quote  #1 

The Nasdaq announced Friday, twelve new components would be added to the NDX, taking the place of twelve existing members.  The change will take effect December 19th.

 

New Additions: AVTI, CDNS, CKFR, DISCA, EXPE, GOOG, MNST, NIHD, NVDA, PTEN, RHAT, URBN

 

Deletions: CECO, DLTR, ISIL, IVGN, LVLT, MLNM, MOLX, NVLS, QLGC, SANM, SNPS, SSCC

 

After seeing some of the new additions, several of which have been big movers over recent weeks, one would assume the pending changes will have an impact upon NDX behavior following the realignment.

 

Curiosity motivated a look at the impact over the last ten weeks (since the first of October, 2005) upon the NDX behavior if the twelve new members had been added at the beginning of October.

 

The first chart is a comparison of the NDX unweighted average in its current configuration versus the unweighted NDX average if the proposed stocks were a part of the NDX membership since the October bottom.  Since the weighting realignment of the new members was not announced, the current and proposed NDX component unweighted averages were used in this exercise.

 

With the high fliers coming into the NDX index, it was surprising the current NDX configuration's unweighted average has stayed with, and at times outperformed the proposed membership's unweighted average, illustrated in the first chart.  With the likes of Google joining the NDX, it will be interesting to see what weight it carries in the standard, weighted NDX.

 

 

Since the first of October, the cumulative AD line of the newly proposed NDX components (blue curve) has nominally outperformed the cumulative AD of the current NDX members (black curve).  The slightly superior liquidity strength of the proposed component additions was perhaps a factor in the decision to add/delete the stocks impacting the NDX realignment.

 

 

For the proposed and current member cumulative Up-Down volume line, the current NDX components have had a slight advantage over the proposed NDX membership, although the advantage is nominal and virtually indiscernible in the below chart. The two UD line variants (ratio adjusted) have tracked one another very closely over the past ten weeks.

 

 

 

The last chart is the ratio adjusted $ weighted Up-Down volume ($UD) cumulative volume lines of the current NDX components (black curve) and the proposed NDX membership (blue curve) since the October bottom.  This particular measure of money flows give a noticeable strength advantage to the proposed NDX membership over the current NDX components. 

 

The superior positive net money flow of the proposed NDX configuration is not too surprising due to the high fliers who will soon be assimilated into the NDX.

 

 

Although not illustrated in graphical form, the total volume of the proposed NDX constituents versus the current NDX members over the past ten weeks, is virtually the same, with the proposed aggregate membership volume being only 0.4% over the current NDX components.  For those who track NDX related volume tools such as the liquidity premium, the volume wash is good news.

 

If time had allowed for assembling a longer historical time series of the proposed NDX components, it would have been interesting to compare the current and proposed members' McClellan indicators.... too much to do, too little time.

 

I was quite surprised by the unweighted price strength of the current NDX membership relative to the proposed NDX constituency since October.  To me, this suggests the twelve NDX outcasts did not perform all that poorly with respect to percentage price changes since October.

 

It will be interesting to observe the impact on all affected issues in the realignment over the next couple of weeks as index funds scramble to reconfigure their funds.  Perhaps vulnerable stocks such as Google will have a momentary reprieve in their inevitable corrections.

 

FWIW

 

Randy

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geosing

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Reply with quote  #2 

Randy,

 

To tell you the truth, when I read about the Index changes and was updating my NDX group, my first thought was: I bet Randy is at work figuring out the impact of the changes. And here you are.

 

I am sure that the changes will add to the volatility of this index, even if it is marginally so. I for one hope so and NQ increases its ATR of around 20 points which has been the mean for 2005.

 

As far as funds scrambling ... I doubt this will happen. I am certain savvy managers already knew of the changes prior to public announcement. Just look at the 12 deleted stocks all declining in the first week of December. Most the 12 additions did better - except for URBN. At least some hedgies must have prepositioned themselves. I think the public buying the additions hoping for quick profits may be disappointed.

 

Geo

PS: You have a typo for the ticker ATVI.

 

 

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mortiz

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Reply with quote  #3 

Geo,

 

Without a doubt, GOOG will have an impact on the volatility of the revised NDX constituency, since its current market cap, which allegedly is the criterion for weighting, is larger than the other 11 newbies combined.  As far as I am aware, this is the first major index other than the Russell 1000 that has included GOOG as a component.  If the Nasdaq weights the revised NDX according to current market cap as is claimed, GOOG should be in the top five.  Currently, the top ten market cap NDX components comprise 40% of the Q4 weighting. The remaining 11 components will be in the noise level with respect to the weighted index.

 

"AVTI" was a typo in this post, my lookup symbol table for downloads has the correct ATVI symbol.

 

As far as large fund realignment with the new components, it is likely many managers were already loaded with the new issues prior to the public announcement. Over the years, I have owned a few issues when announcements were made of their additions to indices such as NDX and SPX, and the results were mixed... some performed well for a short period, others didn't move too much.  The big movers mainly occurred during the 1999-2000 time frame, but everything was going parabolic during that period.

 

As you opine, the public will likely be bag holders this time as well.

 

Thanks

Randy

 

 

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mortiz

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Reply with quote  #4 

Geo,

 

Had an exchange with Tom McClellan Sunday on the NDX component change topic, and Tom brought up a good point:

 

"I look every year at the outcasts and the newbies in the NDX, and the overall tendency is for the outcasts to do better the following year. Newbies that make the capitalization requirements for entry have often worked hard to get there, and are thus tired. Outcasts are beaten down after a cold streak, and thus may be ripe for a comeback. Funny, no?"

 

I looked at a few ousted/new issues from the past couple of years, and for the following 6 to 12 months after the changes, Tom's observation was typically pretty close to the end result. 

 

FWIW

 

Randy

 

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geosing

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Reply with quote  #5 

Randy,

 

Other analysts have made similar observations. Even the ones thrown out of the Dow tend to do better. Theory is: not being part of the index, the fundamentals tend to influence the price action more significanctly on those issues, whereas they were somewhat chained to the index moves before.

 

Geo

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