A ratio or relative strength analysis between the Nasdaq Composite Index (COMPQ) and S&P 500 Index (SPX) may offer insights into the leadership shifts between technology/growth stocks and blue-chip and stable large-cap SPX stocks.
Historically, the higher beta and growth-related technology stocks outperform SPX during bull trends. On the other hand, the stable SPX stocks tend to outperform the smaller capitalization and more volatile COMPQ stocks during market downturns.
The divergences that develop near market tops and bottoms can offer hints as to key market reversals and leadership shift changes.
In the past month, improvements in the COMPQ/SPX and strengthening technical indicators suggest traders and investors may be returning to technology and growth names. Below is a summary of the COMPQ/SPX analyses.
The negative divergence between COMPQ/SPX and SPX from late-Nov 2021 to Jan 2022 warned of a shift away from technology and growth stocks into the safety of the blue-chip and well-capitalized SPX stocks. See the enclosed charts of SPX and COMPQ for further information.
A positive divergence may be developing on the COMPQ/SPX relative strength trend, as evidenced by a higher low pattern in the ratio. For instance, the May 2022 low is 2.858, and the Jun 2022 higher low is 2.883. If this trend continues, it may lead to the next relative outperformance cycle in technology and growth stocks over SPX, at least from a near-term basis.
The near-term challenge is for the COMPQ/SPX ratio to break out above 2.95 (50-day ma and Jun 2022 high). The top of the Jan 2022 downtrend channel (3.04) and the 38.2% retracement from Nov 2021 to May 2022 decline (3.07) represents pivotal secondary resistance.
A convincing surge above 3.04-3.07 solidifies the May/Jun 2022 higher lows, extending the COMPQ/SPX trend toward 3.14 (50% retracement). Above this suggests a return to critical intermediate-term resistance at 3.17-3.20 (Feb/Mar/Apr 2022 highs, 200-day ma, and the 61.8% retracement).
Above 3.20 would reaffirm a leadership shift toward technology and growth stocks intermediate term.
On the downside, a violation of 2.858-2.883 (May and Jun 2022 lows) warns of the acceleration of the relative underperformance between COMPQ and SPX.