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.