Nasdaq’s past is a timely reminder.

The Nasdaq 100 Index has had an incredible run, rewarding long-term investors with massive outperformance over the past 20 years. But as traders we want to position ourselves to benefit from short-term events as well.

Look closer at the Nasdaq 100, S&P 500, and Russell 2000, you’ll find a similar setup to today, just 22 years prior, where the Nasdaq was trading incredibly rich compared to the S&P 500 and the Russell.

We can also look at the ratio of the Nasdaq vs its peers to understand on a relative basis, how expensive or cheap the index is trading. Currently, both ratios still trade close to the 2000s high, a critical level where the ratio topped out and then crashed in a dramatic fashion thereafter. From a timing perspective, the Nasdaq 100/S&P 500 ratio took roughly 30 months to bottom out while the Nasdaq 100/Russell 2000 ratio took 27 months. With the current decline only 9 months young, we expect more pain for Nasdaq for quite a while longer.

On a shorter timeframe, we see the 2 ratios near or at critical levels. The Nasdaq 100/S&P 500 ratio seems to have completed a double top, broken the neckline, and then come back to retest the neckline before being clearly rejected. This allows us to be comfortably bearish on the ratio.

As for the Nasdaq 100/Russell 2000, the ratio is currently trading close to a major support level, the break of which will likely send it tumbling down.

To set up this trade, we could:
- Short 1 Nasdaq 100 Futures contract (NQZ2 Index)
- Long 1 S&P 500 Futures (ESZ2 Index)

However, this trade has certain risks as the dollar value effect of a 1-point move in the Nasdaq 100 ($20) is different from a 1-point move in the S&P500 ($50).

Therefore, another way to set up this spread trade would be to:
- Short 5 Nasdaq 100 Futures contract (NQZ2 Index)
- Long 2 S&P 500 Futures (ESZ2 Index)

Where the dollar value of the position is equal whether the Nasdaq or S&P moves by 1 point. 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 low.

We think the Nasdaq’s past behavior might be back to haunt investors, hence we prefer to be on the short side, whether using the outright short or a spread to express our view.

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

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.


Full Disclaimer -

The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.