Will the NASDAQ outperform the Russell?

Really quick post here.

I've been thinking about more trade ideas, and how to structure our view into an outright play on yields.

Rather than looking at bonds for this, I reckon we have a tad more 'safety' by looking to equities indices.

I briefly mentioned this idea in today's Morning Call video 👇

Watch the whole thing so you can see how our thoughts develop, and specifically note our order of priorities.

But the crux of the idea boils down to two US equities indices, and betting on one outperforming the other.

So the combination, or pairs trade, is to be long the NASDAQ ($QQQ) and to be short the Russell ($IWM).

It's seriously simple to visualise the reasoning here.

If we look at the sectors at the bottom of each column, we note that these tend to be value sectors, and the sector we want to focus on at the top (which makes most of the stock market moves these days) is tech (growth + blue chip sovereign bonds).

Blue chip sovereign bonds are a phenomenon that me and a few others have come up with to describe how lowering the risk free rate has led to a shift away from government debt and 'safe' assets to equities which are traditionally higher risk.

Apple, Google, Facebook and Microsoft can be placed into this category (they are also the key drivers of the equities indices so bear this in mind too).

This creates a relationship whereby we are betting on the outperformance of tech versus value, a situation which I think is heavily dependent on how yields turn.

Yields lower, tech should get a bid and value stocks tick down.

Something else to note are the stats in this video from Darius Dale and Alfie P.

Some quotes

Why is is this important?

We are indeed seeing signs of inflation being toppy, and I have maintained this.

I have also maintained that the Fed should be hesitant to act super quickly because they do not truly know the extent to which issues are down to abnormal fiscal policy (which has ended) and supply chains, which are outside of their remit & effect of policy.

Powell's pivot away from 'transitory' I think was largely a political move, as discussed in today's video, and I reckon that there is pressure from the Treasury to get this 'inflation' under control (ironic, since I reckon the market would have gotten it under control itself).

What matters for us, though is the extent to which we reckon the Russell will underperform the NASDAQ...

And here is a good chart that we can eyeball and make some deductions.

Value does OK, but growth overwhelmingly benefits.

With concentrations where they are now (the large tech firms driving returns), Apple and the large tech firms are likely to remain the key driver for the NASDAQ (likely is used loosely here; what I really mean is, 'they will').

And what we really care about is whether the NASDAQ will outperform, which judging by history, it's fair to say it has a good chance of doing.