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Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors.
Before trading, please ensure that you fully understand the risks involved
Trading in financial markets involves significant risk of loss which can exceed deposits and may not be suitable for all investors. Before trading, please ensure that you fully understand the risks involved
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Thursday, November 25, 2021

NASCAN Strategy

By Century Financial in Investment Insights

NASCAN Strategy
NASCAN Strategy

* Trading in financial market carries risk and can result in loss of capital.
* This performance is only observed with historical backtests and not traded by the company.


The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone. Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.

Risks & Assumptions

Trading in financial markets and use of margin involves a significant risk of loss, which can exceed deposits. Please read the complete disclaimer carefully.
The product and investment ideas do not consider the risk profile and financial position of the recipient and may not be suitable for everyone.
Past performance is not indicative of and does not guarantee future results.
It is important to note that Trading pairs is not a risk-free strategy. The difficulty comes when prices of the two securities move contrary to the positions taken resulting in losses. Thus, it is important to adhere to strict risk management rules when dealing with such adverse situations.
Holding cost is subject to change impacting the trade either negatively or more positively.

The reappointment of Fed chair Jerome Powell has markets pricing faster rate hikes with analysts forecasting three rate hikes by November 2022. Since Lael Brainard was considered to be more dovish, appointment of Jerome Powell has reinforced bets that the Fed would tighten the monetary policy sooner rather than later, especially amid spiking inflation. The hawkish FOMC minutes released on 24th Nov 2021 along with strong US PCE Price Index data only further confirmed their belief.

A hawkish Fed could lead to tightening of rates in the near term which could trigger a spike in the short-term yields, while the long-term might remain stable. As a result, there could be curve flattening. Already, the US yield curve has contracted with the spread between 2-year and 10-year treasury sliding below 100 bps to 98.8 bps.

A flattening Treasury yield curve is a threat to the already-faltering global cyclical rally

A flatter yield curve would likely favor Technology shares at the expense of energy, industrials, materials, and financials. It could trigger a reversal of the inflows seen into cyclical shares since late last year. Industrial & material stocks could be prone to more losses along-side the slide in commodities. Besides, the contraction in spreads will likely hurt the earnings of financial stocks as banks typically borrow short-term and lend long-term.

The flattening of the U.S. Treasury curve- A long way to run!

The flattening of the U.S. Treasury curve is truly measured by the narrowing spread between 2-year and 10-year yields and there is a long way for that to run. In the past two decades, the Fed had two rate-hiking cycles that flattened the bond-yield curve. The first ended in 2006 and coincided with a yield narrowing of around 280bps. Meanwhile, the cycle that concluded in early 2019 helped to flatten the curve by around 175bps, though Treasury curve flattening was even deeper in reality because of the fallout from the European debt crisis. This time around, the signal from the Fed has kicked off a sequence, which has already shaved off over 50bps off the curve. But history suggests there is still a long way to go.


Data Source: Bloomberg

Last time the yield curve flattened in 2014, Nasdaq- tech heavy index well outperformed the cyclical heavy- Canada 60 index. Between 2014 & 2015, Canada 60 index fell by 2%, while the tech heavy Nasdaq index rallied by 28.9%. As can be seen in the chart below, ratio rallied from 0.997 to 1.3185.


Data Source: Bloomberg

Pair Strategy which involves long position on Nasdaq 100 index and short position on Canada 60 Index could be a good way to capitalize on this trend.

Energy, industrials, financials, materials & consumer discretionary account for 70% of Canada-60 index. On the other hand, Nasdaq 100 consists of big names like Microsoft, Apple, Alphabet & Adobe among others. These well-established US tech stocks are likely to outperform the Canada 60 index in the long run. The pandemic has exacerbated the significance of tech to the wider economy and that impact will likely increase further in the future, even in a post-pandemic world since that world will categorically be transformed by an acceleration toward automation and tech-enabled services. As such, there’s good reason to believe in the long run this sector will keep up better than the rest.

Nasdaq 100 Index Top 10 components

Company Symbol Weight
1 Apple AAPL 11.319
2 Microsoft Corp MSFT 10.766
3 Amazon.com Inc AMZN 7.692
4 Tesla Inc TSLA 5.833
5 NVIDIA Corp NVDA 5.124
6 Alphabet Inc GOOG 3.987
7 Alphabet Inc GOOGL 3.724
8 Meta Platforms Inc FB 3.411
9 Adobe Inc ADBE 2.046
10 Netflix Inc NFLX 1.869
SUM 55.6%

Canada 60 Index

Name Weights based on market cap
Financials 33%
Energy 14%
Information Technology 13%
Industrials 10%
Materials 9%
Communication Services 6%
Consumer Staples 5%
Consumer Discretionary 4%
Utilities 3%
Real Estate 1%
Health Care 1%
SUM 100%

Given the flattening of the yield curve and current sector weightings, Nasdaq 100-tech heavy index is likely to outperform Canada 60 index.

Risks and Assumptions for Back-tested trading strategies
The risks and assumptions listed here are not intended to be an exhaustive summary of all the risks and assumptions involved.
The strategy might suffer from look-ahead bias which occurs due to the use of information or data in a study or simulation that would not have been known or available during the period being analyzed. This can lead to inaccurate results in the study or simulation.
Future price movements may not be exactly the same as the historical price movements and this could lead to variation in performance.
Testing can sometimes lead to over-optimization. This is a condition where performance results are tuned so high to the past they are no longer as accurate in the future.
The model assumes no slippages in trading. Slippage refers to the difference between the expected price of a trade and the price at which the trade is actually executed.
Drawdowns in actual trading can be higher than the tested system and losses could be significant in the event of leverage.
Unforeseen events can lead to variation in performance from the tested trading strategy.
The tested result has been computed with price feeds available from Bloomberg.
The testing environment has not considered transaction or any other costs.
Trading indicators used for the purpose of testing has been provided by Bloomberg.
The strategy might suffer from data mining fallacy, selection bias and backfill bias.

Data Source: Bloomberg
Data as of : 25/11/2021

Arun Leslie John
Chief Market Analyst

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