Big Cap vs. Small Cap Tech Ratio Appears Fragile

Below is a chart and brief excerpt from today’s Market Situation Report written by Tier 1 Alpha. If you’re interested in learning more about the Hedgeye-Tier 1 Alpha partnership, there’s more information here.

Today's bonus chart stretches back to the early '90s, yet few others capture the essence of 2023 as clearly. It displays the NDX/Russell ratio using a logarithmic scale.

Using a logarithmic scale underscores the rate of change in the ratio over absolute numbers. This approach is particularly effective in illustrating relative performance disparities: the NDX is only 5% shy of its all-time peak, while the Russell lags 27% behind its own historic high. Notably, the equal-weight S&P 500 is down 11% from its peak.

Our very own ProfPlum has delved into the dynamics underpinning this superior performance, primarily attributing it to passive indexation and market inelasticity. We recommend the 12-minute breakdown from the Tier1 webcast for a comprehensive understanding. It's a worthwhile review. Remember that the same forces that have positioned Apple as a "store of value" could also pivot to its disadvantage.

This chart presents several key insights. It traces a well-established, enduring trend, suggesting its probable continuation in the long run. The technical analysts among us might ponder the implications of a modest pullback in this ratio, akin to a "cup and handle" pattern. Despite the limitations of technical analysis, it's a conversation worth having. Let’s have some fun with math. Suppose the ratio reverts to early 2023's log scale level of 6, assuming a slight decrease in the Russell to 1600; the NDX would then have to drop from its current level of 16000 to 9600, marking a 40% drop. Should the ratio only revert to 7 with the same Russell value, the NDX would drop to 11200, a 30% decline. These are speculative scenarios, but they quickly convey how even slight shifts toward the mean can significantly impact the tech behemoths at such lofty valuations.

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