VOT Research Report
Market Analytics and Considerations
The Nasdaq and Dow Jones are travelling down parallel but distinct trajectories.
An opening on the back of the US CPI might be seen from a relative value standpoint.
The Fed is addressing the price pressure that exists. Is the DJIA/NDX ratio out of balance?
Since the Federal Reserve realized there may have been an inflation issue simmering for more than 20 years, the Dow Jones Index (DJI) and Nasdaq (NDX) have been under pressure.
Former Fed Chair Alan Greenspan famously referred to the frothiness in the tech sector as “irrational exuberance” in late 1996.
Many onlookers appeared to have forgotten that once he changed his mind in 1997, the Nasdaq experienced an upswing that lasted until 2000. In any event, a lot of experts think that was the beginning of the contemporary period of the infamous Fed put.
A different discussion should be had about central banks’ asymmetric tilt toward looser policy than would otherwise be required.
Governments and central banks all across the world rushed to put policies in place at the start of the epidemic in 2020 to assist their own economies and societies.
The flood of stimulus that was supplied to the world economy as a result allowed money to rush into a variety of systematic risk that would ordinarily have trouble raising money. Perhaps the clearest example of this episode of “exuberance” is the mainstreaming of the Special Purpose Acquisition Company (SPAC).
The equity markets also benefited from a flood of investor interest. Businesses that depend on debt and new rounds of capital raising prospered in this setting. It’s possible that many tech companies fall into this group.
Since such Fed conceded that the inflation demon is no longer contained, monetary policy has been aggressively tightened in 2022. Equity market indices have suffered a decline from their high as a result.
The Nasdaq (NDX) may continue to be susceptible as financial circumstances get tighter. The Nasdaq, which is heavily invested in technology, may not be as exposed as the Dow Jones Industrial Average (DJIA).
Trading a long DJIA/short NDX relative value position would be the greatest way to convey this opinion if it holds true. This week, the DJIA/NDX ratio briefly returned to being greater than 3. In November 2021, it reached an all-time dip of 2.14 during the pandemic.
Although the ratio has already increased significantly, it may reach and perhaps surpass its long-term average of 5.31. (1995-2022). Prior to the pandemic, there was a 3-year average of 3.6. (2017-2020).
While the Fed has made it clear that tight monetary conditions are required to control inflation for the foreseeable future, any significant shift in this perspective will jeopardize the viability of this stance.
The US CPI numbers were not available when this essay was published, but this number may present a chance.
