Top Advisors Corner

NDX:SPX Relative Strength Ratio

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The big winners in 2020 were the FANG stocks which dominate the Nasdaq 100 Index (NDX). They outpaced the S&P 500 Index (SPX) by a pretty large margin. But now, in 2021, there is a big adjustment going on, as those outsized gains of 2020 are getting digested and consolidated. 

This week's chart shows the NDX:SPX relative strength ratio, which is super easy to calculate. Just take the index reading of the NDX and divide it by that of the SPX. If the line moves upward, it means that the NDX is outperforming on a relative basis, which it does a bunch of the time. If it moves downward, it means the NDX is underperforming, usually by going down faster. 

I show that ratio here, along with its 200-day simple moving average, because the relationship between the two is pretty important. If the relative strength ratio wanders too far away from the 200MA, that can signal an important condition for the stock market and, more importantly, for the NDX. And it works better at negative extremes than at positive ones.

Here is another way of looking at that relationship:

This chart shows an indicator which measures how far the relative strength line in the top chart has deviated away from the 200MA. The recent underperformance by the NDX has taken that relative strength ratio well below its 200MA, and thereby taken this indicator to a pretty deeply negative reading. Excursions down to -4% or lower are pretty good markers of really important lows for the NDX. They show that investors have shunned those stocks too much, setting the stage for the tide to come rushing back in.

The recent low for this percent deviation indicator is the lowest since all the way back in 2006. Similar readings over the past few years have represented really great buying opportunities for getting into the Nasdaq 100, not as a day-to-day trade, but as a long-term one. So as we get through the corrective work that is still needed in the month of June, as discussed in our most recent McClellan Market Report newsletter and Daily Edition issues, the message of these indicators is that we should look for the Nasdaq 100 stocks to lead the way higher.

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