What the SPX Outperforming the NDX Means for Stocks

Plus, summarized data for rotations such as this

Senior Quantitative Analyst
Mar 31, 2021 at 8:00 AM
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There has been a rotation among the indexes recently. The large cap S&P 500 Index (SPX) is barely below its all-time high while the tech-heavy Nasdaq 100 Index (NDX) is about 7% off its highest reading. The NDX has typically outperformed the SPX over the past 20-plus years. This week I’m looking at past times, similar to now, when the roles are reversed. I’m most curious as to what tends to happen going forward.

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A Couple of Ominous Signals 

I have a couple price charts on which I marked instances that the three-month NDX relative strength fell to 0.95. I broke the charts into two different time frames to make them more readable. This first chart goes from 1997 through 2010. The chart shows two major market crashes -- the tech-bust of 2000, and the financial crisis of 2008. Signals occurred near the top of both crashes. A few other signals occur at shorter-term pullbacks.

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Here’s a chart for 2011 through the present. Three signals have occurred since then, but none are worrisome.

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Looking at the Numbers 

Above we saw on a chart all the times the NDX three-month relative strength to the SPX fell to 0.95. The tables below summarize how stocks performed going forward after the signals since 2000. The SPX has tended to struggle in these circumstances. The index has averaged a slight loss six months later and its one-year return was half of what the typical yearly return has been. The percentage of positive returns after these signals was close to normal so the underperformance is due to some individual big losses. This makes sense as I noted above that signals occurred just before a couple major market crashes. The last line in the tables below shows the percentage of time the S&P 500 beat the NDX. The SPX has typically lagged the NDX since 2000 and that has also been the case after these signals.

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Finally, here is the summarized data for the Nasdaq-100 Index. Like the SPX above, the NDX has tended to struggle after signals when you look at the average return. A year after the signal, the NDX averaged a return of below 2%. The typical one-year returns since 2000 for the index have been over 9%. The returns are being skewed by some big downside returns as the percentage of positive returns after a signal has been close to the percent positive anytime. It seems that after these signals, typically, everything is fine. But beware of those instances when it isn’t fine because it can be really bad.

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