Growth vs Cyclical Relationship In Focus As FOMC Announcement Looms

NAS100/US30 Relative Strength
Please note that past performance is not an indicator of future results.

The top chart shows the weekly relative strength of FXCM's Nasdaq contract, the NAS100, to its Dow Industrials proxy, the US30. A movement to the northeast suggests outperformance by the NAS100 and a movement to the southeast suggests outperformance by the US30. The lower chart shows the weekly US10Y yield. Both charts have a black 30-week simple moving average overlaying.

The US30 is effectively a blue-chip index of cyclical and mature industrial companies. These have generally reached the stage where a percentage of profit is distributed back to shareholders via dividends. This is different from growth companies that generally retain their profits and reinvest them back into the company and not distribute. I.e., the cash flows are nearer to receipt from cyclicals than growth companies.

Therefore, as yields decline, the discounting factor benefits growth over the stable cyclicals precisely because the market understands that their cash flows are paid in the longer term. As such, the NAS100 outperforms as yields come down (blue rectangles). However, we have seen US10Y yields appreciate over the last year and at the same time the outperformance of the NAS100 has waned to the point where the relative strength is moving sideways (green rectangles)

This week, market participants focus keenly on the FOMC statement and press conference on Wednesday at 6:00 PM and 6:30 PM (GMT). The Fed is expected to announce tapering in their $120bn/month asset purchasing program, which will likely end in the middle of 2022. If yields adjust to this, it will be interesting to see how the relative strength between the NAS100 and US30, growth vs cyclicals, adjust. If the rates move upwards, it may apply pressure to the NAS100.

Russell Shor

Senior Market Specialist

Russell Shor joined FXCM in October 2017 as a Senior Market Specialist. He is a certified FMVA® and has an Honours Degree in Economics from the University of South Africa. Russell is a full member of the Society of Technical Analysts in the United Kingdom. With over 20 years of financial markets experience, his analysis is of a high standard and quality.


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