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.