The Gilmo Report

October 21, 2018

October 20, 2018

The NASDAQ Composite Index is the weakest-performing of the major large-cap indexes by virtue of its -10.56% peak-to-trough decline that hit a near-term low last week. This contrasts with the peak-to-trough declines of over -7.83% and -7.61% in the S&P 500 and Dow Jones Industrials Indexes, respectively. After a natural reaction rally early in the week, the NASDAQ ended its third-straight down week Friday on a reversal back below the 200-dma on roughly even volume.

 

GR102118-$COMPQ

 

Even weaker, however, has been the small-cap Russell 2000 Index, which logged its lowest closing low since topping on the last day of August. It is also sporting a peak-to-trough decline of -12.12%, leading all comers. The relatively weaker performance in the NASDAQ and the Russell makes perfect sense within the context of my contracting P/E theory as the driver behind the current market correction.

Given that most of the huge P/E expansions we’ve seen have been most egregious in the tech and growth areas of the market, those indexes with the greatest concentration of these stocks have suffered the most. No surprise there.

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