Page 178 - THE MARKET WHISPERER

174 PART 6 - Indices, Sectors And Crystal Balls

NASDAQ 100: The Second Most
Important Index

The NASDAQ stock exchange also receives a good share of display space
on my computer screens. The NASDAQ 100 index, with its NDX symbol, is
the second most important index for day traders. The index was developed
by the NASD, National Association of Securities Dealers, which established
the NASDAQ stock exchange. This index represents the price of the leading
100 NASDAQ companies. Since the NASDAQ stock exchange contains a
very high proportion of technology companies, the index closely reflects
the state of affairs in these companies. A unique phenomenon for our
times, in light of the sharp rise in price of Apple’s stock [AAPL], developed
when Apple covered some 20% of the index’s movement. We often joke
that if you buy NASDAQ 100 ETFs, you get Apple, plus a bonus of some 99
other stocks…

At this point it is not necessary to list the entire 100 important companies
represented by the index, which you can find easily on any financial site,
but you surely realize that in addition to Apple, the NASDAQ 100 includes
other well-known companies such as Microsoft [MSFT], Intel [INTC],
and Google [GOOG]. As with the S&P 500, here, too, each stock carries a
different weight. If Apple goes up some 3%, it will have stronger influence
on index performance than a similar rise by a less important stock.

Since the S&P 500 contains the 500 most important stocks in the market,
clearly a significant proportion of NASDAQ 100 stocks will be among the
S&P 500. This explains why the S&P is considered more important and
reliable than the NASDAQ 100. Why, then, do I give this index a central
position on my trading screens? Is the S&P 500 not sufficient?

The answer relates to the volatility of the NASDAQ 100. It is comprised
chiefly of stocks from technology companies. It is well known that these
stocks show high volatility relative to the lack of volatility typical of most
of the “solid” stocks in the broader S&P market index. Technology stocks
are more volatile because the “dream element” embodied in their price
is higher than the same“dream element” in a company unrelated to the
sphere of technology. For example, the impact of a new electronic gadget