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What the Nasdaq's lag is telling us about the market

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Even as the and the Dow Jones industrial average hit all-time highs yet again Wednesday, that third well-known index, the Nasdaq composite, is lagging badly behind.

In fact, as of midday trading Wednesday, the Nasdaq would have had to rise more than 4 percent to retake the level it hit in July 2015 —which itself was only a smidge higher than the great tech bubble highs seen in early 2000.

This is clearly a reflection of the types of stocks that have been driving the market lately. While it would be incorrect to refer to the Nasdaq composite as a tech index, more than 40 percent of the weight of the index is indeed comprised of tech stocks. The second-largest weighting belongs to consumer services, and health-care stocks follow.

Unfortunately for the composite, information technology and health care have been the two worst-performing sectors in the this year, save for the financials. Meanwhile the best-performing sectors, the rate-sensitive telecom and utilities categories, have almost no weighting within the Nasdaq.

This explains why the Nasdaq composite is only narrowly in the green this year, while the S&P is up more than 5 percent.

More generally, it points to the somewhat restrained nature of the recent stock market rally. This is not a speculative, exuberant surge. It is a mild march higher that appears largely driven by falling bond yields, with some help from an energy rebound.

The million-dollar question now is whether the character of the rally is set to shift, helping more economically sensitive stocks to lead the market — and allowing the Nasdaq to join its more defensively weighted brethren.

Of course, a series of micro events could also spur such highs as well. Eddy Elfenbein of the Crossing Wall Street blog said Tuesday on CNBC's "Power Lunch " that Nasdaq records are likely in the weeks ahead, as Microsoft and Apple report earnings that could send tech stocks sailing.