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Can the Markets Move Forward without the Nasdaq?

David Becker
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www.iforex.com
Can the Markets Move Forward without the Nasdaq?

In early May, the S&P 500 nearly notched up an all-time, helped by a sector rotation from high flying momentum stocks into value stocks. The question for investors as they ponder the future direction of US equities is whether the S&P 500 index can continue to rally if the leadership does not come from the Nasdaq?

During the past 3-years, movements in the large cap S&P 500 index have been driven by changes in momentum stocks. One way to evaluate whether technology stocks lead large cap stocks is to evaluate the ratio of the S&P 500 index relative to the Nasdaq composite and comparing the movements in the ratio to the actual changes in the S&P 500.

The ratio is a simple quotient of the S&P 500 index divided by the Nasdaq composite. The chart of the ratio (Nasdaq / S&P 500) and the S&P 500 show a positive correlation, which means they move in the same direction. So when the spread (Nasdaq / S&P 500 index) moves higher the S&P 500 moves higher. When the ratio between the Nasdaq and S&P 500 is declining, the Nasdaq is underperforming the S&P 500 index.

The spread has been under pressure recently and it seems unlikely given the recent history that the broader markets will be able to move higher without the leadership of growth stocks. The tecnnicals for the spread are looking ominous. The 50-day moving average is poised to cross below the 200-day moving average of the spread, which would reflect that a downtrend is in place. Either the correlation will continue to break down, which is currently the situation, or either the S&P 500 or Nasdaq will change their current directions. This is a tough question for investors to answer.

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