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NDX versus SPX

The start of any new year often results in rotations and positioning by retail and institutional investors as they implement various tactical and investment strategies. However, this year we are witnessing overly aggressive rotational actions.

The dominant themes this year are higher inflation and rising interest rates. The twin issues have been brewing since last year, starting in November 2021 for the Nasdaq/growth stocks and in January 2022 for the rest of the stock market.

The rotations have increased soon after the Russian/Ukraine crisis. Stocks with high price-to-earnings (P/E) with no visible earnings have come under heavy selling pressures. The perception on the street is that these stocks lack earnings until many years from now, and hence their future income streams will be worth much less when interest rates are higher.

This year has been unusual. Some investors fear this is the start of something more significant. Selecting the right stock markets, sectors, and stocks has become increasingly challenging. It will likely continue into 2022.

The good news is the rotational actions across different markets, sectors, and individual stocks have created inefficiencies in both pricing and allocation, possibly resetting assets to equilibrium levels. The bad news is the rotational pressures may persist and can overshoot to extremes before mean reverting to normal.

One market dislocation worth investigating is the Nasdaq 100 Index (NDX) versus the S&P 500 Index (SPX). The outcome of these two markets remains crucial to many investors. By studying the historical relative performance trends, we hope to gain further insights into their long-term cycles.

Enclosed below are two charts. The top half is a weekly ratio analysis of the NASDAQ 100 Index (NDX) divided by the S&P 500 Index (SPX). The chart shows the relative performances of NDX and SPX over the past forty years. As you can see from the chart, NDX has dramatically outperformed SPX from Sep 1990-Mar 2000, reaching a ratio high of 3.31 on Mar 2000. From this peak, it would plummet to a ratio low 1.01 (Sept 2002) as evidenced by the onset of the Tech/Telecom/ bubble burst from Mar 2000 to Sept 2002.

Since 2002 NDX has overwhelmingly outperformed SPX. In Jul 2020, NDX briefly surpassed the dot-com bubble ratio high of Mar 2000. It appears the COVID-19 pandemic lockdown and the subsequent reopening created a sharp surge in the NDX/SPX ratio. The pertinent question is this a false breakout (bearish interpretation), a double top (neutral to bearish), or a double bottom (bullish)?

The NDX/SPX ratio is nearing another inflection point as the ratio tests pivotal support coinciding with the double bottom. A breakdown coupled with violation of the 2020 uptrend channel (green dash line) confirms an NDX/SPX top and warns of the next selloff toward the internal trendline (burgundy dash line), and below this to the bottom of the 1990 uptrend channel (red dash line). Under this scenario, SPX is likely to outperform NDX over the next couple of years. There is also the possibility that if the NDX/SPX ratio maintains above the bottom of its double bottom pattern, there may be another outperformance cycle coming from NDX over SPX, at least near-to-medium term. Surging above the double top/double bottom reaffirms the resumption of the structural outperformance trend.

The bottom chart is the weekly chart of the Rate of Change indicator (ROC) over the past 52-weeks or 1-year. The momentum indicator shows the NDX 100 Index underperformance cycle peak at -8% to -10.5%. Only two times in the past forty years did the ROC indicator exceed -8% to 10.5% extreme level – during 1990-1991 recession (-17.5%) and 2000-2002 bubble burst (-55% to -56%).

On 1/24/22, the ROC indicator plummeted to a low -8% on the backdrop of higher inflation, higher interest rates, and the Russia/Ukraine geopolitical crisis. Violation of -10.5% will trigger a ROC decline to the extreme level of 1990-1991 (-17.5%). However, it appears that ROC may also find support at 8%, establishing a momentum low and setting the stage for a recovery. The outcome will help decide whether Nasdaq stocks and growth stocks return to favor or if this is a dead cat bounce before the start of another round of NDX selling.

Source: Chart courtesy of

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