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Leadership Returns to Nasdaq 100 Index?

Two dominant themes remain the Fed’s tightening process and the direction of interest rates. The two issues have impacted the stock market, starting in November 2021, as evidenced by the NDX/SPX relative strength peaking and the ensuing collapse in growth and technology-related stocks.

The rotations away from growth and technology also increased soon after the start of the Ukraine-Russia war. Companies with high price-to-earnings (P/E) with little or no current earnings and profits suffered heavy selling because growth stocks tend to underperform peers as their future income streams will be worth much less when interest rates rise.

This year is turning into an inflection point as the state of the US economy and the direction of interest rates hint at structural changes in financial markets. Many fear a recession will lead to a structural bear/trading range stock market. Others believe the recent stock market setback is a cyclical bear decline within an ongoing structural bull trend.

The good news is the rotations in different markets, sectors, and individual stocks led to market inefficiencies in pricing/allocation and potential buying opportunities. However, the discrepancies may take time to confirm.

One market dislocation worth investigating is the Nasdaq 100 Index (NDX) versus the S&P 500 Index (SPX). Analyzing the historical relationships between the two markets can help investors gain valuable insights into longer-term performances.

Enclosed below are two charts. The top chart is a weekly ratio analysis of the NASDAQ 100 Index (NDX) and the S&P 500 Index (SPX), showing the relative performances of NDX and SPX over the past forty years.

NDX has dramatically outperformed SPX during two specific timeframes. First, from Sep 1990 to Mar 2000, reaching a ratio high of 3.31 during the Tech/Telecom bubble in Mar 2000 before plummeting to a low of 1.01 (Sept 2002) near the end of the crisis.

The second outperformance cycle started in 2002 as NDX regained its leadership role soon after the Tech/Telecom bubble period. NDX dramatically outperformed SPX by briefly surpassing the dot-com Mar 2000 high (3.31), recording new all-time highs of 3.57/3.64 in Jan and Dec 2021.

The COVID-19 pandemic lockdown and the subsequent reopening may have created a sudden and sharp surge in the NDX/SPX ratio. The pertinent question is this false breakout, leading to a double top breakdown and the potential of a long-term underperformance cycle between NDX and SPX.

NDX/SPX ratio found pivotal support at 2.746 (Jan 2023), rebounding from the 2002 uptrend channel (burgundy dash line).

A violation would have confirmed a deeper selloff toward the 1990 uptrend channel (red dash line – 2.63) as NDX underperforms SPX.

However, the ability to find support and the subsequent rebound from 2.746 has resulted in the recent rally to pivotal intermediate-term resistance at 3.29-3.34 (Jan 2022 breakdown, Mar/Apr 2022 and Mar 2023 highs, and 61.8% retracement from Nov 2021 to Jan 2023 decline).

A golden cross buy signal in Mar 2023 also hints at an intermediate-term recovery.

The ability to break out above 3.31 (Mar 2000 high) and extension of the 2002 uptrend channel (green dash line at 3.30) confirms a breakout and the resumption of the long-term NDX/SPX relative strength uptrend.

The bottom is a weekly chart of the Rate of Change indicator (ROC – 8.32) for NDX/SPX over the past 40 years.

The bottom of the range is -8% to -10.5%. Two times in the past forty years did the ROC indicator exceed the -8% to 10.5% range – during the 1990-1991 recession (-17.5%) and 2000-2002 bubble burst (-55% to -56%).

Last year (2022) was the third time the ROC indicator slipped below the extreme threshold, plummeting to a low of -17 in Jan 2023 or close to the 1990-1991 lows before staging a sharp reversal.

Formidable intermediate-term resistance is 13 to 14, coinciding with the 2012-2018 highs. A breakout is technically significant as this signals a retest of long-term resistance at 28 to 32.

If this is another significant bottom, it may lead to a sustainable recovery toward 13 to 14. However, a breakout is required to reaffirm the resumption of long-term leadership roles from NDX and growth stocks.

Source: Chart courtesy of

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