The top chart below is the monthly relative strength of FXCM's CFDs for the DJI and NDX, i.e., US30/NAS100 (RS). The analysis starting point is at the dashed red vertical line dated 02 September 2002. The middle chart shows the RSI for the RS. Finally, the bottom chart is the US 10-Yr Treasury note with a 12-month simple moving average overlay. There are several observations to be made:
* The US30 declined against the NAS100 over this period (black downwards trendline).
* For the most part, the RSI remained under 50, the bearish side of the oscillator during the period (blue rectangle).
* Yields dropped from around 4.00% to the current level of 1.93%.
From these observations, we make the following inferences, as yields declined, the NAS100 benefitted far more than the US30 due to its time value of money characteristics. This causality resulted in the declining RS (black trendline) and the weak RSI (blue rectangle). We make further observations:
* There were instances when the US10-Yr yield moved above its 12-month SMA, which matched with positivity in the RS's RSI (green ellipses).
* I.e., there were pockets of RS strength for the US30 and weakness for the NAS100.
* This strength is not an absolute relationship, as seen between 2008 and 2009 (red square). This deviation may be due to the global financial crisis (GFC) shock, although this is not definitive.
We draw attention to the right-hand side of the chart. The US-10Yr Treasury is above its 12-month SMA (bottom red ellipse). Moreover, the RSI is heading towards the strong side of the RSI, above 50 (upper red ellipse). We must monitor this carefully because inflation pressure is running at rates of change last seen in the early 1980s. This dynamic may be strong enough to push the RSI above 50 and sustain above this level, reflecting a very different technical picture from 2 September 2002 until the current period. If there is a new cause-effect dynamic, the RS may flip with the US30 showing sustained strength against the NAS100. One need not look very far to make the fundamental case because of the NAS100's sensitivity to higher rates. The Fed's hiking cycle kicks off on 16 March – the question is, will it be 25bps or 50 bps? The latter may be a catalyst for new RSI positioning as capital reallocates. We admit this to be speculative at this stage but continue to monitor it.
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.