The NASDAQ is Growing in More Ways Than One

Tech is hot.  The volume of significant news flow in the technology sector in recent months has been staggering.  Whether it’s taxi/car-sharing service Uber’s $18 billion valuation, Apple’s $3 billion acquisition of Beats, Google Glass, Amazon’s new Fire phone or Microsoft’s new CEO, the technology industry is booming as it changes the way we live and interact with each other.In response, tech stocks have rallied aggressively.

Over the past year, the NASDAQ-100 index – considered to be the definitive benchmark for the tech sector – has risen more than 33 percent, significantly outpacing other broad-market indices.  A quick look at some of the largest constituents makes it clear why this is the case: Apple, Microsoft, Google, Amazon and Facebook – these five companies together comprise 36 percent of the index and are all focal points for recent tech news flow.

A Walk Down Memory Lane

For some, talk of tech and the NASDAQ may bring memories of the bubble in technology stocks of the late 1990s and the painful correction of the early 2000s. But the tech sector of today is very different from what it was 15 years ago.

Firstly, the index has changed.  While the NASDAQ-100 retains a significant weight in technology companies, this sector now comprises only 59 percent of the index, while consumer services and healthcare represent 20 and 14 percent respectively.  Additionally, the index methodology was modified in 2011 to ensure no individual constituent stock or group of stocks comprises an excessive weight in the index.  As has always been the case, financial stocks are excluded from membership.

Tech companies themselves have also matured.  The “all growth and no dividends” model of the bubble years is a memory.  Today’s tech companies are bigger and more financially sound than ever.  In fact, the dividend yield of the NDX is now 1.4 percent, only a small discount to the 1.8 percent of the broader U.S. market.

How Are Markets Responding?

Traders love a market that moves, and as broad-market index volatility has decreased in 2014, the NASDAQ has taken center stage.  After a flurry of activity in the first two months of the year, most broad market averages have drifted into a slow-grind, low-volatility trend.  But while the NASDAQ-100’s year-to-date performance is very close to that of the S&P500, these high-level numbers hide much of what’s happened along with way.

If we look at the 75-day period from March 1 to May 15, we see that the S&P500 traded in only a 3.5 percent range with realized 30-day volatility never exceeding 12 percent.  By comparison, the NASDAQ traded in an 8 percent range with peak volatility of 20 percent.

At CME Group, we’ve seen the impact of this greater volatility reflected in our NASDAQ-100 futures volumes, which have increased 33 percent versus the same period last year to an ADV of more than 315,000 contracts.  More significantly, activity in options on the NASDAQ-100 futures have increased more than 400 percent over the same period, as active traders gravitate toward more volatile sectors in search of new opportunities.   In particular we’ve seen traders using short-dated weekly options to express directional views around tech-sector newsflow resulting in weekly Nasdaq options volume increasing nearly 10-fold to over 1,800 ADV year-to-date.

Given the recent heavy volume of technology company news, there are plenty of reasons for market participants to have strong views – both positive and negative – on the future direction of the tech sector, and particularly the NASDAQ-100.  For traders looking to express these views, there are two things which underscore the current trading environment for NASDAQ futures: volatility and growth.  The NASDAQ futures market is liquid with tight spreads, making E-Mini NASDAQ 100 Futures one of the cheapest ways to trade the technology sector. So regardless of whether you are bullish or bearish, active traders are using the E-Mini NASDAQ 100 futures to implement their views, and do so efficiently.

It’s unlikely we’re seeing another tech bubble, but both the long and short term views represented in these trades tell us that the NASDAQ is once again an exciting market to watch.

Matthew Tagliani is Executive Director of Equity Products at CME Group.

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