Monday, November 9th, was the largest laggard outperformance we have in the Nasdaq Dorsey Wright (NDW) data with laggards outperforming leaders by more than 16%. Momentum crashes are not a new thing. All types of things drive the leaders/laggards spread on a day-to-day basis. NDW tracks daily performance of the leaders and laggards going back to December 29, 1989. Below is a discussion of 10 of the largest negative spread days (or momentum crashes) we have on record. There are a number of things that trigger these events. Some come at tops, others come during transitions, and some come near bottoms. The laggard groups aren’t the same all the time either. Whether that news comes from the Federal Reserve, a court case, analysts, the companies themselves, or now a COVID-19 vaccine, the one similarity is that it catches the market off guard and makes people re-think their overall thesis. Whether that new thesis plays out is only known in hindsight.
(Note: The momentum ranks to determine leaders and laggards are calculated by taking the price return over the preceding 12 months less the most recent month. The leaders group is the top quintile of prior returns and the laggards is the bottom quintile. The groups are rebalanced monthly and equally weighted. There are no transaction costs assumed. You can’t directly invest in these indexes; they are for illustrative purposes only.)
April 18, 2001 (Leaders: +1.36%, Laggards: +12.77%)
The Federal Reserve unexpectedly cut rates sending stocks soaring. By the spring of 2001, the Technology sell-off was in full bloom so those shares were actually the laggards. Technology was a huge winner, and Industrials also did well. The assumption was that a stronger economy would help Technology shares that were extremely out of favor. Industrials also well that day. The leaders were up, but way behind the laggards. Financials were about 25% of the leaders’ index at the time, so the shift from growth to value had already occurred. Even with the prospects of a stronger economy, the Energy names in the high momentum basket were down on average that day.
April 3, 2000 (Leaders: -8.83%, Laggards: +0.76%)
This was right at the beginning of the Technology sell-off after the huge late-1990’s outperformance. The catalyst for the sell-off was driven by a 15% decline in Microsoft. At the time, Microsoft was engaged in a federal court case, and a judge’s ruling against the company was seen as potentially damaging. The NASDAQ lost about 7.5% that day so the weakness in Microsoft spilled over to the other leadership. At the time, Technology was about 75% of the leaders index (account for the Information Technology and Communication Services groups) and was weak across the board accounting for two-thirds of the decline in the leaders index. The laggards held their own mainly driven by strength in Financials.
March 15, 2000 (Leaders: +5.04%, Laggards: +4.87%)
There doesn’t seem to be one specific news item that dove the rotation from the leaders to the laggards. This was near the peak in the Nasdaq/Growth/Momentum cycle. Technology was weak across the board, and Financials and Consumer Discretionary performed well. This was the first major laggard day in a cluster that would be the beginning of a major shift from large to small and growth to value.
April 12, 2000 (Leaders: -8.08%, Laggards: +1.31%)
This was another day in the cluster that was near the beginning of the major rotation from large to small and value to growth. The catalyst for this day’s sell-off was analysts lowering forecasts for some major technology stocks: Microsoft and Compuware. At the time, valuations were sky high, and any earnings weakness or slowdown was a problem the inflated valuations weren’t able to handle. Like other laggard days around this time, Financials and Industrials were much stronger than other groups.
April 5, 2001 (Leaders: +3.36%, Laggards: +12.95%)
Positive guidance from Dell and Alcoa put the market in a good mood. By this time, the market had peaked, and the market was in an established downtrend. Technology shares made up more than half the laggards index by this time so the good news from Dell was a godsend for investors still holding out hope for a resurgence in battered technology companies. Hindsight would show that it was just hope, and there was still plenty of work to be done to work off the excesses in those groups. Healthcare was the group that drove the leaders higher. During this period, Financials were generally the catalyst for a lot of leadership outperformance. However, this was a day driven by growth names and Technology, so it isn’t surprising to see a group more associated with growth drive the leaders higher.
April 10, 2000 (Leaders: +7.80%, Laggards: +0.59%)
At the time, this was the second-largest point loss for the NASDAQ of all time. The largest point drop had been just one week before. There isn’t one single factor you can point to that began the sell-off. The rotation was beginning. All of the volatility between leaders and laggards during the spring of 2000 just shows how split opinions were regarding the future prospects of Technology stocks versus old-economy stocks. Like other days during this rotation, it was Technology lagging and Financials leading.
April 9, 2009 (Leaders: +2.13%, Laggards: +11.18%)
A month after the bottom of the Global Financial Crisis there was good news from one of the major banks. At the time, investors were still unsure whether there would be any banks left! Wells Fargo said it expected a profit of $3 billion for the first quarter, and that lit the fuse for a huge rally. At the time, Financials were still more than 20% of the laggards’ index. Their performance over the trailing year had been so poor that the one-month laggard rally didn’t move the needle as much as you would think. Banks were strong across the board, and Industrials also did well. The leaders didn’t do badly at all and participated nicely in the rally – just not to the extent of the laggards. There were some leading stocks that had moved up to the leaders group, and they did well along with Healthcare. But the real action was concentrated in the laggard groups where performance was strong across the board.
January 3, 2001 (Leaders: 2.76%, Laggards: 11.58%)
The Federal Reserve surprised markets with a rate cut on the second trading day of the year. The Nasdaq had the biggest rally in history, and growth stocks outperformed value stocks by a historically wide margin. About 9 months after the market top, Technology stocks had begun to shake out. The leading group was still about 13% Technology, but the laggard group had jumped all the way up to more than 50%. The laggard rally was strong across the board. The group of technology stocks still in the leading group accounted for about 90% of the performance gain in that group. The other interesting thing to note is how the leading and lagging groups change over time. Growth and value groups, for example, are fairly static. But the leaders and laggards are very adaptive to changing markets. In 2000 the largest weight in the leading group was technology, but just one year later, technology had moved to the largest weight in the laggards group.
April 10, 2001 (Leaders: +2.04%, Laggards: +10.15%)
This was another day that appeared to have no particular catalyst for the laggard rally. An article from CNN Money stated, “No single event sparked the buying. Instead, analysts said the gains reflect a bet among stock investors that months of losses amid hundreds of corporate profit and sales warnings were overdone.” The market was in a defined downtrend, and working off the excess valuations from the late 1990s. As it turns out, things weren’t overdone. The market would continue lower for another two years and finally, bottom out in March of 2003. We were far enough into the decline that technology stocks dominated the laggard group. The rallied across the board, and it was a great day for growth. This laggard rally would prove to be very short-lived as the market continued its downtrend with the laggards continuing to underperform until the eventual market bottom.
March 10, 2009 (Leaders: +3.95%, Laggards: +12.06%)
The rally off the Global Financial Crisis bottom begins. The selling was exhausted. Citigroup announced some good news, and regulators said the uptick rule was coming back to make short-selling more difficult. The leaders didn’t perform poorly at all – they just couldn’t keep up with the performance of the laggards. Financials did incredibly well along with Consumer Discretionary and Industrials stocks. Those were all groups that had been decimated during the bear market. Things like Staples and Utilities that had held up well really lagged on the day. This is the only laggard rally in the top 10 that is right at a market bottom. It would be followed up a month later with another massive laggard rally when investors had more confidence in the market’s recovery.
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