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In a simple regression analysis of the S&P 500 and the Nasdaq Comp, a
measurment of the residuals provides a very good indicator for
determining which index is outperforming the other (and when it does not
matter which one your in).
The R Square on the last 266 observation of the S&P 500 and the Nasqaq
Comp is .715602 which means that about 71% of the variances in the Comp
can be explained by the movement in the S&P. More importantly it means
that about 29% is explained by something else. I used a 10 day
Durbin-Watson Test of the residuals to construct an indicator to tell me
if I should be invested in the S&P 500 or the Nasdaq Comp. The attached
chart show the results. The peaks in the Durbin-Watson coincide with
periods of decreased auto correlation and times when it does not make
much difference whether you are in the S&P or the Comp. I think this
confirms the info posted by others that the money is flowing into the
Comp. Unfortunately (for the longs) this indicator appears to mean
reverting. I think it is more likely to have the Comp come back down to
meet the S&P much like Aol did when it bought Time Warner, fantasy will
come back down to reality.
Ron McEwan
Attachment Converted: "f:\eudora\attach\durwat.gif"
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