No one is safe when the floor falls out!

20 мар. 2023 г.

UBS buys Credit Suisse, central banks liquidity provision, and a massive repricing in rates marked a significantly volatile week. As the storm of bank contagion continues to brew, one index in particular is trading unlike the others!

We’re talking about the Nasdaq here.



Trading higher while its peer indexes get beaten down in a somewhat unusual fashion.



Another way to look at it, since this February, S&P500, Dow Jones & Russell 2000 is down 5%, 7% & 13% respectively, while the Nasdaq is pretty much flat.

In one of our previous posts, we highlight how the ratio of Nasdaq/S&P500 topped higher than the 2000s Dot-com bubble.

While the ratio traded lower after we covered it, this recent move basically put the ratio back to the level when we first highlighted it. The ratio also traded cleanly off the .236 Fibonacci line and the trend support. With the ratio now at the previous resistance level, and extended from the trend line, this could present another opportunity to consider a short.

Interestingly if we use a Logarithm y-axis, the upward trend of the ratio becomes clearer.







Here, we see all 3 ratios at critical resistance levels and away from the long-term trend.

While it’s a bit challenging to pinpoint the exact reason, we think the chorus of lower target rates and more cuts priced in has propelled the possibly interest rate-sensitive benchmark higher. But, when the floor falls out, it doesn’t matter if you can jump the highest! We think the current springboard for the Nasdaq Index can only take it so far and here’s why:

If a true contagion event does play out, then the sell-off is likely not going to discriminate. And looking at the 2000s period, Nasdaq continued to tumble while the fed paused and cut rates.



Of course, we’re not blind to the fact that the 2000s was a whole different era and the crisis was driven by a tech bubble, so the Nasdaq would of course, face a larger correction. Our point here is to highlight that in a true contagion event, sell-offs do not discriminate.

On the flip side, if a contagion event does not play out, the Fed is still faced with Inflation which has been way above its target. Not forgetting the Fed’s dot plot terminal rate at 5.1% and a hawkish Fed chair just days before the SVB bank collapse, if the coast is clear of any banking crisis then the path for further rate hikes or holding rates higher for longer could come back into play. Both of which could trigger a repricing in the Nasdaq.

Given the opportunistic setup in all 3 index ratios, it is possible to establish a short on any of them.
Using the Nasdaq Futures and S&P500 Futures as an example we could:
- Short 5 Nasdaq 100 Futures
- Long 2 S&P 500 Futures

In this trade set-up, the dollar value of the two legs of trade will remain equal, despite the direction in which the Nasdaq or S&P moves. If NQ future moves by 1 point, the short leg of the trade (5 lots of NQ futures) would change by 100 USD. So does the dollar value in the long leg of the set-up (2 lots of ES futures). The same setup is possible with the Micro Nasdaq and S&P500 Futures as well, whereas in the latter case, the 1-point move is equal to 10 USD instead of 100 USD. Trading this spread would be eligible for a margin offset of up to 70%, meaning that the capital required to set up this trade is much lower.

The charts above were generated using CME’s Real-Time data available on TradingView. Inspirante Trading Solutions is subscribed to both TradingView Premium and CME Real-time Market Data which allows us to identify trading set-ups in real-time and express our market opinions. If you have futures in your trading portfolio, you can check out on CME Group data plans available that suit your trading needs tradingview.com/cme/

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The contents in this Idea are intended for information purpose only and do not constitute investment recommendation or advice. Nor are they used to promote any specific products or services. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. A full version of the disclaimer is available in our profile description.

Reference:
cmegroup.com/markets/equities/nasdaq/micro-e-mini-nasdaq-100.contractSpecs.html
cmegroup.com/markets/equities/nasdaq/e-mini-nasdaq-100.contractSpecs.html
cmegroup.com/markets/equities/sp/micro-e-mini-sandp-500.contractSpecs.html
cmegroup.com/markets/equities/sp/e-mini-sandp500.contractSpecs.html