Data &
Technology
Research
Reports
Report Solutions
Reports Library
Actionable
Strategies
Free
Resources
Simple Backtest Calculator
Simple Seasonality Calculator
The Kelly Criterion Calculator
Sentiment Geo Map
Public Research Reports
Free Webinar
Pricing
Company
About
Meet Our Team
In the News
Testimonials
Client Success Stories
Contact
Log inLoginSign up
< BACK TO ALL REPORTS

S&P 500 Equal-Weight vs. Cap-Weight Relative Ratio Reversal

Dean Christians
2021-08-10
A short-term relative ratio indicator for the S&P 500 has now reversed from the lowest reading since October 2008. Let's assess the forward return outlook for the index.

Each Monday, I provide an update on what I'm seeing with my absolute and relative trend indicators. One of the indicators in the ETF tables measures the consecutive number of days above or below the 10-day moving average. The indicator provides a perspective on short-term price momentum.

One can also apply the consecutive days above or below the 10-day moving average to the ratio of two securities. In this case, we would measure how one security compares to another for a perspective on relative momentum.

The ratio between the S&P 500 equal and cap-weighted index is a closely followed indicator. It provides a perspective on whether the troops or the generals are leading. When the ratio is rising, the average stock is participating. Conversely, when the ratio falls, participation is narrow. i.e., the generals are influencing index performance to a greater degree.

The relative ratio for the equal vs. cap-weighted S&P 500 index has now traded above the 10-day moving average for ten consecutive days. A ten-day count is pretty common. However, suppose we assess the conditions before the current winning streak. In that case, we see that the 10-day count reached 29 consecutive days below the average. If you were wondering, that's the longest streak below the average since October 2008.

Let's conduct a study to assess the forward return outlook for S&P 500 under the following conditions.

  1. The consecutive days below the 10-day average count for the relative ratio gets to 29 days.
  2. The consecutive days above the 10-day average count for the relative ratio gets to 10 days after the days below count resets at 29 days. i.e., the current scenario.

CURRENT DAY CHART

HISTORICAL CHART

As the chart shows, it's highly unusual to see the days below count reach a level of 29 outside of a bear market environment. 

If you were wondering, I plot the days below count as a negative value in case I ever want to display the days above count in the same chart.

HOW THE SIGNALS PERFORMED - EQUAL-WEIGHT

Results for the S&P 500 equal-weighted index when the consecutive days below the moving average gets to 29 days looks weak across almost all timeframes. Typically, the signal dates reflect bear market environments or periods preceding a bear market.

HOW THE SIGNALS PERFORMED - CAP-WEIGHT

As expected, the S&P 500 performance looks weak across almost all timeframes.

Now, let's assess what happens when the days above count hits ten after the days below count resets at 29 days. i.e., a reversal in the relative ratio count trend.

HOW THE SIGNALS PERFORMED - EQUAL-WEIGHT

Besides the 1-month timeframe, results are better when one waits for a reversal in relative momentum. However, I don't see anything that gets me excited.

HOW THE SIGNALS PERFORMED - CAP-WEIGHT

Results look similar to the equal-weighted data. i.e., lackluster

Let's lower the reset threshold to 20 consecutive days below the moving average and keep the ten-day count above condition to assess more instances.

HOW THE SIGNALS PERFORMED - EQUAL-WEIGHT

Besides the 1-month timeframe, results look much better.

HOW THE SIGNALS PERFORMED - CAP-WEIGHT

Results look slightly mixed to weak in the short term. I like the performance and risk/reward profile starting in the 2-month window.

Today's study once again emphasizes the unusual nature of the current bull market environment.

Sorry, you don't have access to this report

Upgrade your subscription plan to get access
Go to Dasboard
DATA &
TECHnologies
IndicatorEdge
‍
BackTestEdge
‍
Other Tools
‍
DataEdge API
RESEARCH
reports
Research Solution
‍
Reports Library
‍
actionable
Strategies
Trading Strategies
‍
Smart Stock Scanner
‍
FREE
RESOUrCES
Simple Backtest
Calculator
Simple Seasonality
Calculator
The Kelly Criterion
Calculator
Sentiment Geo Map
‍
Public Research Reports
‍
Free Webinar
COMPANY
‍
About
‍
Meet our Team
‍
In the News
‍
Testimonials
‍
Client Success Stories
Pricing
Bundle pricing
‍
Announcements
‍
FAQ
© 2024 Sundial Capital Research Inc. All rights reserved.
Setsail Marketing
TermsPrivacyAffiliate Program
Risk Disclosure: Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

Hypothetical Performance Disclosure: Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight. In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.

Testimonial Disclosure: Testimonials appearing on this website may not be representative of other clients or customers and is not a guarantee of future performance or success.