Model Price Chart on the Nasdaq 100 Stock Index

If your reading the financial press over the last few days you may have noticed the Nasdaq 100 Index achieving 13-year highs over the last few trading days.  So what does this bit of news mean?  Is this news bullish or signs of market froth – excess speculation – as some market commentaries have suggested?  Can anybody put these new highs in context so one can understand its relevance?

ModelPrice Guy to the rescue!

It just so happens that we have a model price chart of the Nasdaq 100 going back to 1995.

Here is our long-term Model Price chart of the Nasdaq 100.

Nasdaq 100 Index with monthly price bars, EBV Lines (colored lines).

Nasdaq 100 Index with monthly price bars, EBV Lines (colored lines).

Observables from this chart

1.  The most amazing observation is the valuation high the Nasdaq achieved back in 1999 early 2000.  As you can see from our chart this technology laden index spiked up to EBV+9.  This is an unfathomable valuation level for an index to achieve especially considering what has transpired in the last decade.  Through the power of math let me try to put this valuation level in context.  The Nasdaq closed yesterday, September 18, 2013 at 3231.31, just under EBV+5.  If the Nasdaq Index traded at EBV+9, the valuation level back in 2000 – apples to apples comparison, the Nasdaq Index would be trading at 17,285 – some 435% higher.

2.  After the tech-wreck of 2000 the Nasdaq settled back to an adjusted EBV+5.  I say adjusted because our EBV lines sharply turn downwards after 2000 reflecting write-offs of corporate assets primarily goodwill recognized when mergers took place locking-in high equity valuations on the merged company’s balance sheet.  (AOL/Time Warner is the best example of a mega merger to subsequent breakup of the company resulting in tens of billions of write-offs primarily of goodwill.)

3.  From the market bottom in 2002, at EBV+5, the Nasdaq traded within the zone between EBV+5 and EBV+6 until the financial crisis of 2008.

4.  During the financial crisis of 2008, the Nasdaq had a negative transit of EBV+5 finally bottoming at EBV+3.  (Remember this is the current valuation level the S&P 500 Index now resides – see my Monthly S&P 500 Market Strategy Update blogs)

5.  Since the market bottom of March 2009, the Nasdaq has worked its way up, valuation wise, to just underneath EBV+5 mirroring the performance of the S&P 500.

Having a closer look with our short-term chart of the Nasdaq 100

Nasdaq 100 Index with weekly price bars, EBV Lines (colored lines).

Nasdaq 100 Index with weekly price bars, EBV Lines (colored lines).

As you can see EBV+5 for the month of September is 3289.  The Nasdaq 100 Index closed at 3231 on September 18th.  This only leaves a 1.8% cushion for future performance.  As I have noted in my previous blogs, EBV+5 is a special EBV line in model price theory.  Companies over the EBV+5 valuation level means ‘the market’ is giving equity capital by way of share valuation to expand market share of its products or business growth.  As I have noted in previous blogs companies such as Apple (blog) and Microsoft (blog) have had negative transits of EBV+5 in the last year and these companies are obviously big weights in the Nasdaq 100 Index.  The risk, yes there is always risk, the Nasdaq Index falls to EBV+4 or 2383 that represents a fall of over 26% from yesterday’s close.

The Big Question

The obvious ‘Big’ question here “Does the Nasdaq 100 Index have a positive transit of EBV+5?”  The answer is “I don’t know”.  I am probably more certain that EBV+5 remains a ceiling for the index for quite sometime.  Bye the way, this isn’t bearish news by many means.  Looking out one year or September 2014 we calculate EBV+5 for the Nasdaq Index to be 3840, 16% higher.  Not a bad return considering a spectrum of possible returns from other asset classes.


So hopefully I have put this business news story – Nasdaq hitting new 13-year highs – in context.  Is this news signs of froth and worrisome that a technology market crash of 2000 is just around the corner.  I don’t think so.  Are there big and quick returns to be had by investors in this highly visible market index that contains America’s leading technology companies?

Probably not.

However slow and steady rates of return are possible as the Nasdaq Index crawls under EBV+5, the most likely course of future action, isn’t a bad outcome at least in my opinion.

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