IMPACT OF US 10 Y YIELDS ON MAJOR US INDEXES
We always here on the financial media of the inverse correlation between US 10 Year yields and the major stock indexes. Understanding this correlation may give you insight as to how to deal with a rising rate environment. In Tradeview, you can easily compare each index with the 10 Year Yield (US10Y) to view how they correlate. For simpicity I have done this only with NDQ which is the index that has the strongest degree of inverse correlation. It would be a good excercise to do this with SPX, DJI, IWM and FDM (Microcap). The results may suprise you in that there is no where near as much correlation in those other indexes and FDM seems to have the least correlation.
There are many inputs to price action. Interest rates are just one. So for maximum impact, I limited the period of time I looked back to mid-May 2021 when we were apparently saw light at the end of the COVID tunnel (for the first time). This is also a bit after many Americans received their third economic impact payments which is about the time interest rates started moving. This chart shows:
1. It takes a large changes in interest rates to significantly impact the NDQ index
2. There appears to be a delay of 3-4 weeks on these changes on the direction of the NDQ index. Perhaps you can use these pivots to predict future price action on the index?
3. The latest steep rise in rates has only recently impacted NDQ which is in the final stages of forming a head and shoulders top. If we continue to see bearish action this week, the neckline may be broken and even retested within the next 10 days.
Last year IWM dramatically underperformed the other US indexes which is unusual in a good year. Normally small caps lead such advances. The big suprise is that the micro-cap indes, FDM outperformed all other US indexes and seems to be pretty unaffected by these interest rate changes. Even after a massive rally in 2021, most of FDM's top holdings have a very low but positive PE and are still trading at or below fair value. At the time of publication of this idea, all major US indexes were down 1.7% (SPX) - 2.5% (Russell 2000). FDM is down 1.62%.
There are many inputs to price action. Interest rates are just one. So for maximum impact, I limited the period of time I looked back to mid-May 2021 when we were apparently saw light at the end of the COVID tunnel (for the first time). This is also a bit after many Americans received their third economic impact payments which is about the time interest rates started moving. This chart shows:
1. It takes a large changes in interest rates to significantly impact the NDQ index
2. There appears to be a delay of 3-4 weeks on these changes on the direction of the NDQ index. Perhaps you can use these pivots to predict future price action on the index?
3. The latest steep rise in rates has only recently impacted NDQ which is in the final stages of forming a head and shoulders top. If we continue to see bearish action this week, the neckline may be broken and even retested within the next 10 days.
Last year IWM dramatically underperformed the other US indexes which is unusual in a good year. Normally small caps lead such advances. The big suprise is that the micro-cap indes, FDM outperformed all other US indexes and seems to be pretty unaffected by these interest rate changes. Even after a massive rally in 2021, most of FDM's top holdings have a very low but positive PE and are still trading at or below fair value. At the time of publication of this idea, all major US indexes were down 1.7% (SPX) - 2.5% (Russell 2000). FDM is down 1.62%.