NDX Stocks’ Average Drawdown Increasing

Most people think of "market breadth" as looking at Advances minus Declines.  But there are lots of ways to portray the behavior of a large group of stocks.  This week's chart looks at a rather unique one I created several years ago.

The Nasdaq 100 Index (NDX) made a new all-time closing high on Feb. 19, 2025.  And before that had happened, there was already a new high in QQEW, the equal-weighted ETF tracking the stocks in the NDX.  But curiously, the average drawdown among NDX component stocks is not following the path of the index.

To calculate this, I look at every component stock in the NDX, and calculate each stock's drawdown from its own 52-week closing high.  For a stock making a new high, its drawdown will be 0%.  Then I average together these drawdown figures for all 100 stocks to get the indicator you see here.  I also invert its scaling to better match the price action.

Most of the time, this average drawdown indicator matches the movements of the NDX, which is what one would expect.  Generally rising prices means that stocks' drawdowns will shrink, taking the indicator higher in the chart.  So most of the time this indicator does not have much to say.

Occasionally, though, we see a divergence appear between the NDX making higher highs and this drawdown average making a lower one.  That is when things get interesting.  The message of such a divergence is that while the big cap stocks which drive most of the index's performance may be doing well, there is increasing pain among some of the components, which can be a sign of liquidity problems.

I noted in my newsletter and my Daily Edition the divergence which was evident in Q4 of 2024.  That divergence remains in effect now, even with this week's higher high for the NDX.  But we also see a much lower reading for this average drawdown indicator, which is reminiscent of what we saw at the final price high in late 2021.  Note the blue marks calling out that similarity.  This is not a bullish development for the market overall.