Inside Markets — RTY/NDX Index Ratio

The SPX maintains bullish trend dynamics at levels above 5600 with our Russell 2000/Nasdaq 100 Index ratio (RTY/NDX) now signaling an increased likelihood for the next leg to be led by cyclically-sensitive sectors. Yesterday, the RTY/NDX Index ratio managed to break above its YTD based pattern at 0.116 with sustained higher closing levels increasing our conviction in a more lasting cyclically-led bull market. On its own, the RTY has carved out a bullish technical progression following a 2.5 year base pattern that coincided with the widest RTY/SPX performance gap in history of nearly 40 percentage points. While the potential for an RTY catch up trade seems like a compelling opportunity, we note a rich forward multiple of ~22x that roughly matches that of the SPX. Our preference is to find incremental cyclical exposure in companies from the S&P Midcap 400 (MID) that trades at only ~16x forward EPS.

The rapid pace of technological innovation and government change introduces strong cyclical tailwinds and fatter tail risks in our opinion. And a broader distribution of risk/reward requires a more flexible investment approach than what many investors currently have in place.