U.S. Biotechs are in a trough

Another U.S. equity sector which is paying a rare visit to the ‘Oversold’ extremes region are the U.S. Biotechnology stocks.

The Nasdaq Biotechnology Index has simultaneously registered a trifecta of a weekly oversold, a mean reversion to its 200 week moving average and a 2.5 standard deviation move below its rolling week mean.

This current period is only the 5th time this has occurred in the past 25 years.

This index has declined 33% from its September 2021 peak.

May 20, 2022

by Rob Zdravevski

rob@karriasset.com.au

A rare Oversold moment for the S&P 500

During the Thursday May 19, 2022 trading day (which was last night for us in Asia/Pacific/Antipodes), the S&P 500 registered a new (weekly basis) Oversold reading.

This is only the 5th time in 20 years, where it has simultaneously traded to 2.5 standard deviations below its weekly mean and below a Relative Strength Index (RSI) reading of 30.

The S&P 500 (SPX) has now declined 19% from its early January 2022 peak.

This is moment for the S&P 500 has occurred soon after the Russell 2000 did something similar.

However some vigilance is required because the strength and momentum of the S&P 500’s current downtrend is rising and intact and unlike the Russell 2000 (albeit it’s not a rule and nor a prerequisite), the SPX’s 200 week moving average is still 8% below todays price, seen hovering around the 3,500 point level.

Incidentally, for the statistic nerds, the 20% decline seen in late 2018 was one of the more notable corrections which didn’t touch ‘Oversold’.

May 20, 2022

by Rob Zdravevski

rob@karriasset.com.au

Selling U.S. Oil Stocks now

On July 30, 2020, I warned of lower prices amongst the shares of the larger American Oil companies, 

At that time, when Exxon Mobil (XOM) was trading at $45, I made a call that Exxon Mobil would trade down to $33. 

By October 30th, 2020, XOM shares had steadily declined 26% to $32.

This note was written with a sense of juxtaposition that while I was bearish on the share prices of the ‘oil majors’, I was bullish on the actual price of Crude Oil.

A month later (on August 20, 2020), I wrote more about this divergent analysis and I listed 5 stocks which I felt would suffer declines.

Those 5 stocks each declined between 25% and 50% from mid August 2020 until October 30th, 2020.

Meanwhile the price of WTI Crude Oil stayed between $37 and $43 per barrel throughout that time.

Beyond XOM, the other 4 companies on that list included Chevron which eased from $85 to $66, ConocoPhillips declined from $39 to $28, Occidental fell from $17 to $10 and APA (Apache) tanked from $15 to $7.50. 

Now I hear of many broking houses reiterating their ‘overweight’ stance on energy.

Today, I am saying that ‘Going Long’ Oil and related energy stocks doesn’t present the best odds.

It is dangerous adding or entering new ‘long’ positions at current prices.

Since those late October ’20 lows, Crude Oil has rallied significantly and those leveraged free-cash flow oil companies saw their stock prices rise between 3 and 6 fold. Occidental’s shares soared from $10 up its present level of $63, Exxon Mobil has rallied from $33 to $91, Chevron has advanced from $66 to $167, ConocoPhillips rose from $29 to $104 and Apache (APA) climbed from $8 to $40.

Supportingly, WTI Crude rallied from $43 to todays’ price of $108, while Brent Crude moved from $45 to its present price of $111.

And when you consider that WTI Crude  (if we exclude that monumental March 2020 negative -$40.00 price print) has moved up $100 per barrel from that a normalised low of $10 seen soon after that swoon.

I don’t recall any broking houses issuing Buy Advice back then when WTI Crude was trading at $30, $40 or $50, let alone $10.

Today, I hear them calling for $200 Crude Oil.

I’m not trying to call an exact a peak but in terms of probability, it is ‘too late’ to initiate meaningful ‘long’ positions.

Be care chasing Warren Buffet and Berkshire Hathaway’s recent 13F filing announcements about their (increased) Chevron & Occidental holdings. You’ll need to dig deeper when they acquired them and under which terms.

It is the season to Trim, Adjust and Sell.

Exxon Mobil’s shares are now trading at 44% above its their 200 weekly moving average, which is a level not seen for 14 years and is in the percentage range which prompts consolidation or a retracement in the stock price.

The time to be bullish on energy stocks and energy commodities was in Q3 of 2020…..not now !

The ‘fat part’ of the trade has been had.

May 20, 2022

by Rob Zdravevski

rob@karriasset.com.au

Copper/Gold Ratio leads them all

There is a skew in probability that the Copper/Gold ratio breaks and leads the next directional move for bond yields.

So while credit may lead equity…….the copper/gold ratio (HG/GC) leads credit.

While I watch the HG/GC closely, a move lower in this ratio bodes well for my call that interest rates move lower and in turn, a further decline in the HG/GC adds to my thesis that inflation also abates.

I reiterate my view that I think the Fed raises rates 3 (or 4) times and then cuts once, at a later date, perhaps by mid-2023.

Market forces and a slowing economy could mean G7 central banks don’t raise rates as aggressively as 7 or 8 hikes that the broking houses have been forecasting.

In the chart below, the U.S. 2 year note yield is in ‘dark blue’ while the HG/GC ratio appears in ‘light blue’.

I also encourage readers to search for older posts that I’ve written referencing the HG/GC.

May 19, 2022

by Rob Zdravevski

rob@karriasset.com.au

Recessions help with the making adjustments

Perversely, a recession may fix many things such as the labour shortages but the balancing act that remains is that higher prices leads to lower demand which leads to frugality and lower GDP.

Declining demand will lead to rising inventory which translates into falling prices.

If interest rates climb in order to stifle inflation, it will also increase the cost of servicing debt which will also affect consumer activity.

If a recession occurs and corporations are experiencing declining margins and lower sales, they in turn will cut their workforce.

There will be more labour available but the amount of job openings that we see now, may not be there.

This falls into the category of ‘being careful what you wish for’.

Keep in mind that servicing ones consumption, property speculation and indebtedness sometimes doesn’t matter, until one has lost their job or had difficulty finding one.

Opening paragraph from this story link is, “Employers posted a record 11.5 million job openings in March, meaning the United States now has an unprecedented two job openings for every person who is unemployed.”

May 19, 2022
by Rob Zdravevski
rob@karriasset.com.au

Macro Extremes (week ending May 13, 2022)

The following assets (on a weekly timeframe) registered an Overbought or Oversold reading and/or have traded more than 2.5 standard deviations above or below its rolling mean.

Extremes “above” the Mean (at least 2.5 standard deviations)

EUR/GBP

Overbought (RSI > 70)

Australian 2, 3, 5 & 10 year government bond yields

Canadian, Spanish, French, Greek, Italian, Swedish, Portuguese and New Zealand 10 year government bond yields

U.S. 2, 5 & 10 year yields

TBX & TBT

U.S. Dollar (DXY) Index

The Overbought Quinella – Both Overbought and Traded at > 2.5 standard deviations above the weekly mean)

None

Extremes “below” the Mean (at least 2.5 standard deviations)

Gold/Copper Ratio

Copper 

Tin

Coffee

Silver

CAD/USD

DKK/USD

SGD/USD

IDR/USD

NZD/USD

AUD/USD

Dow Jones Industrial Average

S&P 400 Mid Cap index

The Nasdaq 100

Sensex

Copenhagen

TAIEX 

and Canada’s TSX.



Oversold (RSI < 30)

TLT & IEF

Russia’s MOEX Index

South Korea’s KOSPI

JPY/USD

EUR/USD

HKD/USD

GBP/USD

FXE

And Bitcoin, Ethereum and Cardano

The Oversold Quinella – Both Overbought and Traded at > 2.5 standard deviations above the weekly mean)

NZD/AUD

KRW/USD

SEK/USD

CNH/USD

Russell 2000 index



Notes & Ideas:

The big news is the return of equity indices peppering 2.5 standard deviations below their weekly mean, along with some commodities such as Silver.

The S&P 500, Nasdaq 100 and the Russell 2000 was amongst those indices hitting lowly extremes, of which I wrote this note earlier last week about the latter.

Incidentally, they have risen 4% – 5% from their intra-day lows seen only days ago.

While Chinese indices rose, for they spent the past weeks in Oversold territory.

Persistent USD strength means many currency crosses are hitting their lower end ‘extremes’ such as the NZD, while the Aussie did so with an intra-week low of 0.6829.

While the downward trend is intact, it is not conclusive that it strengthens from current prices. So, with the consideration of probability there is merit in selling some USD and Buying AUD below 0.6950.

While bond yields continue to play out their peaking process as are selected commodities, many (but not all) of the assets which recently registered an Overbought status, this week made ‘lower lows’ however presumption can be dangerous, as I don’t have enough signals to suggest their recent trends have waned or ended.

In fact, the yield in the following government bonds produced an outside bearish reversal week; Swiss, German, French, U.K., Italian, Kiwi, Swedish and the U.S. trifecta of 2;s, 5’s and 10’s….

And the German, Korean, U.S. 10 year yields and the U.K. Gilts are not Overbought this week.

Corresponding with extended weeks of ‘extremes’ in bond yields (as reported in this weekly publication), I think yields retrace in sympathy with inflation abating.

hint: this is bullish for a bounce in technology stocks.

Other notes include;

Gold broke below a weekly support

Hot Rolled Coil Steel has traded down to and is resting on a support line.

Tin has fallen 27% since its early March high.

The Dow Jones and S&P 500 has seen 6 consecutive weekly declines. Weekly streaks of 6, 7 and 8 are not seen too often. This means be wary of jumping onto the current streak, where probability suggests it close that this streak is coming to an end.

Equally, a streak that is broken doesn’t mean a reversal of a similar length is what follows next.

I’m reminding people that the Australian yield curve hasn’t inverted unlike the U.S., albeit the latter was only so for about 6 days.

And in a coming post, I’ll write about the US 10 year / Australian 10 year spread

The larger advancers over the past week comprised of; 

Baltic Dry Index 14.2% (up 39% in 4 weeks), Gasoline 5.3%, Oats 2.2%, Wheat 6.2%, Shanghai Composite 2.8%, AEX 1.8%, CSI 300 2%, DAX 2.6%, MIB 2.4% & Stockholm 2.5%.

The group of decliners included;

Australian Coal (1.8%), Aluminium (2%), Gasoil (2.8%), Copper (2.2%), HRC (3.6%), JKM (10.2%), Lumber (6.9%), Natural Gas (4.7%), Tin (12.8%), Nickel (6.9%), Orange Juice (5.2%), Palladium (5.2%), Platinum (2.7%), Silver (6.1%), Urea (2.1%), Uranium (9%), Gold in AUD (1.9%), KBW Banking Index (4.6%), Gold (3.8%), Dow Jones Industrials (2.1%), DJ Transports (3%), MOEX (3.6%), Midcap 400 (1.9%), Nasdaq (2.4%), Nikkei (2.1%), Sensex (3.7%), Copenhagen (4.7%), S&P 500 (2.4%),  STI (3.1%), TAIEX (3.5%), TSX (2.6%) and Australia’s ASX 200 fell 1.8%.

May 15, 2022

by Rob Zdravevski

rob@karriasset.com.au  

Bitcoin and S&P 500 hit the target

On March 11, 2022, I wrote this note below, which suggested that Bitcoin and the S&P 500 may simultaneously fall to $29,700 and the S&P 500 declines 20% from its high.

Last night, they did both, on the same day.

Technically, the S&P 500 is 19.8% below its January 2022 high.

My January 6, 2022 quip pointed at Bitcoin visiting the $26,000 – $23,000 level.

That remains entirely possible, for last nights low of $25,400 (depending on the exchange you are watching) entered that zone.

I’ll look for a quick slump to $22,000 before assessing the next move.

However, this post is more about Bitcoin being a better sentiment indicator rather than a currency.

May 13, 2022

by Rob Zdravevski

rob@karriasset.com.au

Mean Reversion is a happening thing

The Russell 2000 is the first U.S. index that I watch to hit a ‘buying range’ which attracts my interest.

Today, it closed at 1,718 points.

It also falls into the category of being the first one down and the first to ‘bottom’.

The weekly chart below shows the RTY marrying its trading below its 200 week moving average (i.e. long term mean reversion has been satisfied) together with registering a weekly oversold reading….

It’s the 10th occurrence in 32 years, but this market and economy doesn’t feel like the 2001 tech crash, the fallout of the 2008/2009 GFC nor the unknown of a 2020 pandemic outbreak.

……..then for the stockpickers out there, there is a host of oversold carnage (bargains) to pick from.

The next indices closing in on the same milestones include the KBW Banking Index, the MidCap 400 and the Nasdaq Transports.

May 12, 2022

by Rob Zdravevski

rob@karriasset.com.au

TSMC is now Oversold

Taiwan Semiconductor’s (TSMC) stock price is Overbought (on a weekly basis) for only the 4th time in the past 25 years.

Remember all that tension and scarcity about semiconductor shortages?

Surely, it hasn’t gone away?

TSMC’s stock price has fallen 40% from its January 2022 high.

Its market capitalisation has been trimmed by $245 billion.

The decline is based on a combination of valuation, market forces, economic ebbs and more so, on the stretched price action of the stock price.

As Russia invaded Ukraine, I wrote this note on Feb 23rd, 2022.

Those puts options are now priced at $18.50.

As far as the stock is concerned, $82 and $76 are buying areas I have circled.

May 10, 2022

by Rob Zdravevski

rob@karriasset.com.au

Alcoa wipes 50% quickly

Only 20 days ago, I wrote this note reiterating my mean reversion theme and I chose the Alcoa stock price as only one example.

I didn’t expect the $55 price target to be seen so soon.

Alcoa has now retraced 50% of the (somewhat parabolic) advance since October 2020.

Investing (in general) involves probability and mathematics.

In conjunction with my other indicators, today I’ll assign a certain probability that Alcoa’s stock price visits the next stop of $44.

In the meantime, the current risk, valuation, sentiment and pricing prompts me to accumulate some Alcoa around this $54-$55 mark.

May 10, 2022

by Rob Zdravevski

rob@karriasset.com.au

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