Reading an Index and a Stock Together: The S&P 500, Nasdaq-100 and Relative Strength

Why read it with an index

Looking at a single stock's chart alone, it is hard to tell whether a move is about the company or about the whole market. A stock that fell on a day the whole market dropped and a stock that fell alone on a day the market rose show the same falling candle, but they mean different things. That is why many people keep a benchmark index open next to a stock chart. For US stocks, the S&P 500 and the Nasdaq-100 are the usual benchmarks; for Korean stocks, the KOSPI. The indexes and stocks in this guide are only examples for reading charts.

The main indexes

Each index holds different stocks and is calculated differently, so the benchmark you choose changes the result of a comparison.

• S&P 500: about 500 large US companies, weighted by market cap adjusted for free float
• Nasdaq-100: 100 large non-financial companies listed on Nasdaq, with a heavy tech weighting
• Dow Jones Industrial Average: 30 stocks, weighted by share price rather than market cap
• KOSPI: every stock on Korea's main board, with large caps such as Samsung Electronics and SK Hynix carrying big weights

What market-cap weighting means

In the S&P 500 and Nasdaq-100, the bigger a company's market cap, the more it moves the index. So on a day the index rises, most of its members may still have fallen. When a handful of giant companies rally, the index goes up even if most other stocks are weak. The KOSPI also gives large chipmakers a big weight, so on some days two stocks decide the index's direction. Before concluding that the market is strong from the index alone, look at an equal-weighted version of the same index or at sector trends to get a better read on market breadth.

Building and reading a relative strength line

A relative strength line plots the ratio of a stock's price to the index value on the same day. Its name sounds like RSI, which measures overbought and oversold conditions, but it is a completely different idea. Here is how to build and read it.

• Collect the stock's close and the index close for the same dates
• Divide the stock's close by the index close for each day
• A rising line means the stock is stronger than the index; a falling line means weaker
• Look at the direction and slope rather than the level itself
• If the stock falls but the index falls more, the relative strength line rises

Rebasing to 100 on the same day

Plotting an index and a stock at completely different price levels on one chart makes comparison hard. A common fix is to set every series to 100 on the start date and plot the changes on the same scale. That lets you compare cumulative returns directly, even between assets in different currencies or price ranges, such as an index and a stock or a Korean stock and a US stock. Going one step further, you can sum up the relationship with numbers such as beta, which shows how much more the stock swings than the index, and the correlation coefficient, which shows how closely they move together. The picture can change a lot depending on the start date, so check several.

Common mistakes

These mistakes come up often when comparing an index and a stock. Avoiding them makes the comparison much fairer.

• Using the wrong market's index: compare US tech with the Nasdaq-100 and Korean stocks with the KOSPI
• Not aligning dates: Korean and US daily candles are a day apart
• Leaving out dividends: price indexes exclude dividends, which skews comparisons with high-dividend stocks
• Using only one start date: a different starting point can reverse the conclusion

Check it with this site's live tools

The stock comparison tool lets you pick up to five Korean or US stocks and indexes, rebases them to 100 on the same day, and calculates volatility, maximum drawdown, beta and correlation, so you can try this guide's method directly. The world markets overview shows period returns for major indexes, including the S&P 500 and KOSPI, on one screen, and the drawdown and recovery tool compares how far an index or stock fell from its peak and when it recovered. Prices may be delayed.

Things to keep in mind

This guide explains how to read an index and a stock together and is not investment advice. A stock that was stronger than the index is not guaranteed to stay that way; relative strength only shows past relative performance. Check index membership and methodology in the index provider's official materials.