Nasdaq Futures Basis - Indication of Significant Recession

3 août

The NQ1!-NDX metric produces a consistent “sawtooth-like” pattern in the lead up to major financial recessions.

The metric tracks the difference in the next expiring NDX futures contract on the CME and the NDX index itself. This paints a picture of how the futures market sentiment differs from the actual market.

Convergence towards zero nearing the futures contract expiry is expected as they begin to represent the same market in that sense. However, this pattern we see of convergence to zero after the basis opens very high is unprecedented and intriguing at worst. There are very interesting discussions relating to this metric:


1. Inflation and interest rate expectations are creating an environment of high volatility which has been reflected in the VIX recently. This could explain the large basis on contract openings.

2. M2 has begun to rise which has seen a normalisation in the T10Y02Y yield curve. Monetary policy may become more dovish in the next year which although a bullish signal, is reflective of ever increasing public and private debt levels. Heightened levels of debt and high volatility are a major risk.

3. The fact that the basis is positive on open and has been trending upwards reflects the futures market’s positive sentiment on the NDX moving forward. Although the market has dropped over -10%, it is not yet intuitively signalling expectations of continued falls as the basis has not fallen below zero.

If the market was sure of a recession, it would almost never happen. However, most market movements are increasingly dictated by debt instead of cash, reflecting increasing risk over time and a degradation in the ability of market information to reflect reality and real valuations. Price signals are no longer intuitive reflections of their underlying assets when debt is invested in them. This could explain the increasing deviation from zero in the basis metric on the NDX as the years pass by.