Trader analyzes stock price action

The NDX has typically outperformed the SPX for the past 20 years

Recently there has been a rotation between the indices. The big cap S&P 500 Index (SPX) is barely below its all-time high during tech heavy Nasdaq 100 Index (NDX) is about 7% below the highest value. The NDX has typically outperformed the SPX for the past 20+ years. This week I look back at times gone by, much like now when the roles were reversed. I am very excited to see what will happen in the future.

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A couple of ominous signals

I have a couple of price charts marking cases where the relative strength of the NDX has dropped to 0.95 after three months. I’ve broken the charts into two different time frames to make them easier to read. This first graph spans 1997 to 2010. The graph shows two major market crashes – the tech bust of 2000 and the financial crisis of 2008. The signals occurred near the top of both crashes. Some other signals appear on short-term withdrawals.

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Here is a graph for 2011 through today. Three signals have appeared since then, but none are of concern.

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Look at numbers

Above we have repeatedly seen on a chart how the relative strength of the NDX has fallen to 0.95 after three months against the SPX. The tables below summarize how stocks have performed since 2000 following the signals. The SPX tends to have problems in these circumstances. The index posted a slight loss on average six months later, and its one-year return was half the typical annual return. The percentage of positive returns following these signals was close to normal, so the underperformance was due to a few single large losses. This makes sense as I mentioned above that signals came about right before some major market crashes. The last row 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 it has been after these signals as well.

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Finally, here are the summarized data for the Nasdaq 100 index. Like the SPX above, the NDX has tended to fight for signals when looking at the average return. One year after the signal, the NDX achieved an average return of less than 2%. The typical one-year returns for the index since 2000 have been over 9%. Returns are skewed by some large downward returns as the percentage of positive returns has been close to the positive percentage anytime after a signal. It seems that after these signals everything is usually fine. But beware of those cases where it’s not okay because it can be really bad.

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