The S&P closed at a new all-time high yesterday. The Nasdaq is about 2% below its own. The standard read is that you want these breaking out together, and tech lagging is a warning.
I don’t buy it, so I checked.
Start with the baseline. New all-time highs beget more highs. Six months out, buying one beats a random entry. Nothing controversial there.
Then the divergence. Since 1999 there have been 47 instances of the SPY making a new high while the Nasdaq didn’t. That’s rare, which is the first useful fact: these two normally break out together.
Rather than picking a threshold and hoping, I swept the spread. Under a 2% gap there’s no meaningful edge. Above it there is, and we’re sitting near 3% right now. That leaves 11 occurrences, which is a small sample and I’m not going to pretend otherwise.
In those 11, the gap closed. And it closed by the Qs catching up rather than the S&P coming down, which is the part that matters. The spread narrows eventually. Nobody knows when.
The simplest expression is buying the breakout with a stop below the recent structure. Members are getting the options structures that define the downside, because 11 cases is not a number I’d size aggressively on.
Below is some ideas on how we can trade this.
