Up until the past couple of sessions, Wall Street indices have continued to grind out a move into all-time highs. In contrast, equity markets in Europe have not had it so easy. They have been struggling sideways, with a lack of traction with ranging formations having set in. The reason for this outperformance comes from the strong outperformance of the US tech sector. This is a move that is attributed to the US bond markets.
- Tech stocks (or growth stocks) are strongly outperforming value stocks in the US.
- US tech stocks are strongly negatively correlated to real US bond yields.
- The tech-lite European markets are subsequently struggling.
US tech stocks have been significantly outperforming
The first half of the year was all about the outperformance of value stocks. This came during the height of the “reflation trade”. Rising bond yields (taking account of rising inflation and growth expectations) were positive for value stocks (solid, cheap, good dividend yield). Value stocks outperformed growth stocks (expensive valuation with little to no dividend yield).
This can be seen in the strong run higher of the Russell 1000 Value ETF (which is a basket of the top 1000 US value stocks) in a move that outperformed the tech-heavy NASDAQ.
However, having struggled for traction over much of 2021, the US tech sector has made a storming bounceback since mid-May. At the same time, the US value stocks have developed a sideways range.
The reason is that US bond yields have fallen over and the reflation trade seems to have come to an end.
Falling bond yields have helped NASDAQ to outperform
When we look at the chart of the NASDAQ versus real bond yields, there is a very strong negative correlation. The correlation averages -0.3 since January 2020 but is recently as strong as -0.5. If real yields remain subdued, then we can expect that the NASDAQ will have strong support.
Value stocks have struggled for traction since mid-May. It has been the tech sector that has pulled the S&P 500 to new highs.
Technically we see S&P 500 and NASDAQ still very strong
Looking at the technicals of NASDAQ futures (MT5 code: NAS100ft) we see that there was a minor corrective slip yesterday. However, this was within a sharp uptrend since mid-May and we see weakness as a chance to buy, especially if the RSI looks to unwind from around 70.
There is initial support at 14,470/14,540 now which we would see as a near term basis of support. A breach of this support would open a deeper correction and an unwind into 13,760/14,060. This is around the lows of a long term uptrend channel.
The S&P 500 futures (MT5 code: SP500ft) have also prevented a corrective slip from taking hold in the past 24 hours. We see a continuation of an uptrend that dates back to October 2020, with a strong band of breakout support at 4210/4265 to use as a buy into weakness.
Tech-lite European markets struggling
This is all in contrast with what is happening in European markets. Both DAX and FTSE 100 have broken their medium-term utprends now and are subsequently settling into choppy trading ranges.
European markets are lacking when it comes to the weighting of tech stocks. Whilst this benefitted them during the first few months of 2021, the loss of momentum in the value stocks are now catching up on the broader indices.
For the DAX (MT5 code: GER30) this just looks to be a period of respite in the bull run. However, the loss of positive momentum evident on the chart since mid-April is restrictive for further gains. The Relative Strength Index has been stuck between 43/63 which hints at only a marginal positive bias to momentum now.
The bulls will be keen to defend the support at 15,275 to prevent a topping pattern from forming. Resistance is building now around 15,750/15,800.
For the FTSE 100 (MT5 code: UK100), the gains always tend to be harder to come by. Once more the support of a six month uptrend channel has been broken. As with the DAX, this is not necessarily a corrective signal yet, but just could be part of a near to medium term ranging formation.
As such, holding on to support at 6940 is important to prevent a correction from developing. Resistance is building overhead around 7150 and will need to be overcome to start to regain upside momentum once more.
Wall Street is outperforming European indices and it seems that it is the tech stocks that are driving the move. If bond yields remain subdued this outperformance looks set to continue.
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