We have always maintained that those who administer the composition of stock indexes such as the S&P 500, Dow Jones Industrial Average, Nasdaq Composite do so in the fashion of rank speculators. As further proof, it was announced that Netflix will be re-introduced to the Nasdaq 100 Index (found here). Below is the charting of Netflix being added and dropped from the Nasdaq 100 Index:
In our article titled “Virgin Media Gets and Offer and Other Important Lessons” we said:
“Look for Netflix (NFLX) to be one of the two stocks added to the Nasdaq 100 index as the stock is twice the price that it was when it was booted from the Nasdaq 100 Index in December 2012, less than two months ago.”
In our article titled “Nasdaq 100: 2012 Re-Rank Review”, regarding the 2011 changes to the index, we said:
“As was the case in previous changes to the Nasdaq 100, the stocks that were added could not exceed the returns of the stocks that were dropped from the index.”
Also regarding the 2010 changes, we said:
“In the middle of a bull market run, the stocks that were added to the Nasdaq 100 Index on December 20, 2010 (found here) have underperformed by a wide margin when compared to the Nasdaq 100 over the last 2 years.”
Finally adding:
“However, as we've indicated with the Dow Industrials in the past (found here and here), being added to an index usually occurs when a stock has already seen its best performance and is far likelier to decline than rise over the medium term (1-3 year period).”
The Nasdaq 100 and the Nasdaq Composite Index are not below their respective 1999 peaks because the companies in the index haven’t rebounded. Instead, as we’ve demonstrated regarding the Dow Industrials from 1929 to 1954, the indexes are below the 1999 peak because the selection of stocks to be added to the index at their high price and popularity instead of near their low price and solid valuations.
