Point & Figure charting can be difficult to understand for clients. By using different chart types advisors can convey their process in a more digestible format for their end clients.
It’s no secret that the S&P Equal Dollar Weighted Index (SPXEWI) has lagged the cap-weighted S&P 500 Index (SPX) over the last few years and while there have been some brief periods of equal-weight outperformance, it has usually been short-lived. Exceptionally high market concentration and outsized contributions by a handful of names have been a defining feature of the market this decade and this has only accelerated in recent years. Looking at the line RS chart between the SPXEWI and SPX, the equal-weight representative has given up all its outperformance since 2003 after peaking in 2015. While this may bring up thoughts of opportunity for the equal weight index to outperform moving forward, the RS relationship has plenty of room to move lower based on historical data. The all-time low for SPXEWI vs SPX was in March 2000 (with data starting in 1990).
Moving onto the point and figure relative strength chart between SPXEWI and SPX on a 1.625% scale, we can see roughly the same picture as the RS line chart but with more discernable information. We can clearly see that the RS relationship has moved below its 2008 low as well as which index is in control on a long-term (signal) and short-term (column) basis. It also becomes clear how far off we still are from those March 2000 levels on this chart. This isn’t to say we’re bound to get back to March 2000 levels, but it lets us know that it isn’t outside the realm of historical possibilities on a long-term basis. One of the biggest advantages of point and figure charting is that it distills price and relative strength movements down into relevant and important information. This comes with some up-front costs of learning the basics of point and figure charting which most clients simply do not have the time or means to do so. Therefore, presenting the information in a less daunting light through other chart types, like a line chart, is an easy way to convey the message of your process without losing your client along the way.
