11/30/23 09:14 AM EST

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.

Learn more about the Market Situation Report written by Tier 1 Alpha.