NASDAQ Leading the Way Out of Crisis Conditions?

Figure 1 summarizes the bifurcation parameter for the NASDAQ Composite Index. The bifurcation parameter has shown steady improvement and has now risen above the -10% threshold. This suggests that the worst of the mean regressive crisis market may be behind us. While the indicator could fluctuate around current levels and create whipsaw results, the big picture is that there has been steady improvement toward a more efficient market state.


Figure 1. The NASDAQ Index is Becoming Less Mean Regressive

The risk and reward profile of the NASDAQ Index is summarized in Figure 2. The Efficient Market State (-10% < BP < +10%) has exhibited an annualized return of 16% with an annualized volatility of 22%. The prior Bull States (when the BP > 10% and R(0) > 0) show a 60% annualized return with moderate risk. The Bear States (when the BP > 10% and R(0) < 0) show a -30% annualized return with 20% annualized risk.


Figure 2. The NASDAQ Index Risk Reward Profiles

To avoid whip saw trading, look for the Bifurcation Parameter to become positive before changing positions in the current environment. While the NASDAQ has improved, the Dow Jones Industrial Average and the S&P Composite Index remain in the crisis state.