Performance Spread
What is the Performance Spread Indicator?
Performance Spread is a relative strength indicator that looks at the difference in percentage change between a primary security and a baseline symbol. The baseline could be the SPY, QQQ, an index, or any symbol that can serve as a benchmark for the primary symbol. It shows how much the primary symbol has outperformed or underperformed the baseline symbol over a specified timeframe.
The performance spread between a security and its benchmark index, sector, or industry can help chartists quickly sort out strong securities that are outperforming the benchmark from weak ones that are underperforming.
Bullish and bearish divergences between price and Performance Spread can indicate stocks that hold up well during broad stock market declines or exhibit weakness during market upswings.
Calculating the Performance Spread
There are three steps to calculating the performance spread.
First, calculate the performance of the primary symbol since the beginning of the chart. This is done by subtracting the price of the first bar on the chart from the price of the last bar on the chart. Then divide the result by the first bar's price and multiply by 100, to convert the raw value into a percentage.
Second, calculate the performance of the benchmark symbol. The formula is exactly the same as for the primary symbol.
The final step is to subtract the benchmark performance from the symbol performance.
The best way to illustrate this calculation is by looking at a PerfChart with both the primary and benchmark symbols.
In the PerfChart above, the price of the primary symbol, Citigroup (C), has increased by 30.28% over the timeframe. The price of the benchmark symbol, the S&P 500 ETF (SPY), has increased by 10.99% over the same timeframe. Subtracting the benchmark performance of 10.99% from the primary performance of 30.28% gives you the performance spread of 19.29%. Citigroup (C) has outperformed SPY by 19.29% over the timeframe of the chart (six months).
Choosing a Benchmark
Often, the benchmark chosen is an index or ETF representing a larger group of securities of which the primary symbol is a member. Chartists often use the S&P 500 index ($SPX), or its corresponding ETF, SPY to represent the market as a whole. Small cap stocks might be compared to the S&P 600 index, $SML. Commodities might be compared to the CRB index ($CRB), and so on.
US stocks can also be easily compared to their sectors or industries by using the $SECTOR or $INDUSTRY pseudo-symbols as the benchmark. As you change the primary symbol on the chart, the benchmark will be automatically updated to reflect the sector or industry for that particular stock.
Interpreting the Performance Spread
The Performance Spread is used to gauge relative strength, which is important for stock selection. Many portfolio managers compare their performance to a benchmark, such as the S&P 500. Their goal is to outperform the benchmark. Managers often look for stocks that show relative strength to achieve this goal.
Chartists can use simple trend analysis on the Performance Spread indicator to determine whether the stock's relative strength is improving or weakening over time.
Like with many other indicators, chartists can also look for bullish and bearish divergences between price and Performance Spread to identify potential price reversals.
Assessing Relative Strength
At its simplest, Performance Spread shows you whether the primary symbol is outperforming or underperforming its benchmark, depending on whether the value is above or below the zero line. The distance from the zero line can give you an idea of the degree of strength or weakness relative to the benchmark.
In the example chart above, two Performance Spread indicator panels have been added; one assessing performance relative to the S&P 500 Index ETF (SPY) and one relative to the Technology Sector ETF (XLK). While NVIDIA (NVDA) is outperforming the S&P 500 index as a whole over the past six months, it is actually underperforming the Technology sector over that time period.
Note: Just because a stock is outperforming its benchmark, that does not necessarily mean the stock is doing well. If the benchmark is also struggling, it may just mean that the stock is struggling less than the benchmark.
Identifying Performance Trends
Chartists can apply basic trend analysis or moving averages to analyze the change in a security's performance relative to its benchmark over time. As with any price chart, the Performance Spread line is trending up when higher highs and higher lows form. Conversely, Performance Spread is trending down when lower lows and lower highs form.
The chart above shows the Performance Spread for Energy Select Sector SPDR (XLE) compared to the S&P 500 ETF (SPY) as a benchmark. Performance Spread crossed above the zero line in early January, indicating that the Energy sector (XLE) as a whole was outperforming the broader market (SPY). It continued to make higher lows until early April, indicating that Energy's outperformance was increasing over those months. The Performance Spread line peaked at the end of March and made a series of lower highs. While XLE is technically still outperforming SPY (by 12.90% as of June 17th), it outperformed by progressively less between late March and mid-June. If the Performance Spread keeps declining at this rate, it will not be long before XLE is underperforming SPY.
Identifying Bullish/Bearish Divergences
A bullish divergence in the Performance Spread signals relative strength during a price decline. Stocks that hold up the best during a decline are often leaders when the market turns around, so it can be helpful to closely watch their performance for signs that the trend is changing.
In the chart above, Broadcom (AVGO) made lower highs from January through early April. During this decline, the Performance Spread with the S&P 500 ETF (SPY) was actually rising, making higher lows, and setting up a bullish divergence. The Performance Spread started out below the zero line, indicating that Broadcom was underperforming the market, but broke above the zero line in early April, just as price broke above the trendline and surged upward.
A bearish divergence in Performance Spread signals relative weakness during a price advance. Stocks that underperform on the way up often lead lower when the market reverses, and can signal a coming downturn in the larger market.
In the chart above, Intercontinental Exchange (ICE) turned sharply upward in April and continued to rise from May to August, making higher lows. Meanwhile, the Performance Spread with the S&P 500 ETF (SPY) remained below the zero line from mid-May to early August, indicating that ICE was underperforming the broader market. During this time, the Performance Spread line continued to make lower highs - a classic bearish divergence. Price peaked in early August and then dropped sharply, just as the bearish divergence deepened its decline.
The Bottom Line
Performance Spread can be used to identify securities that are currently outperforming or underperforming a benchmark. Trend analysis techniques can be used to monitor changes in the levels of outperformance or underperformance over time. Identifying divergences between performance spread and price can help warn of coming changes in trend.
Remember that outperformance does not necessarily mean good performance. If the benchmark is very weak, the primary security that is "outperforming" might really just be showing slightly less weakness than the benchmark. As with all indicators, it is important to use Performance Spread in conjunction with other technical analysis tools.
Charting with Performance Spread
The Performance Spread indicator can be added to SharpCharts and ACP Charts.
Using with SharpCharts
Performance Spread is available on SharpCharts in the “Indicators” section. The indicator can be positioned above, below, or behind the security's price plot. Once the indicator is chosen from the dropdown list, a Performance Spread indicator is added to the chart with the default setting of $SPX for the benchmark symbol. This parameter can be changed to a different preferred benchmark. Chartists may also use $SECTOR or $INDUSTRY as the benchmark; when these "symbols" are used for the parameter, the benchmark will automatically be updated to reflect the sector or industry of the main symbol.
Click here for a live version of this chart.
Learn More: For more details on the parameters used to configure Performance Spread indicators, please see our SharpCharts Parameter Reference in the Support Center.
Using with StockChartsACP
This indicator can be added from the Chart Settings panel for your StockChartsACP chart. The indicator can be positioned above or below the security's price plot.
Click here for a live version of this chart.
By default, the indicator uses SPY as the benchmark, but the benchmark can easily be changed to one that is more suitable for the chart's primary symbol.
Cool Tip: To compare with the current stock's sector or industry, use $SECTOR or $INDUSTRY as the benchmark symbol. The benchmark will be automatically updated as you change to different primary symbols.
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