rob zdravevski's blog

Why equities will rip higher

Amongst a host of perverse reasons, this study is one that assists making the case why I can see equity markets could move higher.

The red vertical lines show moments when the Australian 10 year – 2 year bond yield spread (orange line) is trading at 2.5 standard  deviations below its rolling weekly mean and is also registering a weekly oversold reading.

This event coincides and signals the beginning of or continuation of a rally in the ASX 200 (blue line), with the exception being the green vertical line in Nov 2007.

Note that this study is not used to identify a peak in equities markets.

It’s important to note this observation is around the continuation or extension of a rally and not a signal of a major trough where one would ‘pile-in’.

Not all rallies and bull markets smell the same.

June 8, 2023

by Rob Zdravevski

rob@karriasset.com.au

It hasn’t been sunny for passive ETF index investing

I have created two separate charts depicting the stock performance of the SPY (the well-known index ETF that tracks the S&P 500) compared to Nvidia and Microsoft.

One chart covers a 12-month period, while the other spans 24 months.

It is important to consider the starting date and whether one buys, sells, or trades during the given period. However, the main point I want to convey is this:

If you are a dedicated ETF indexer, you somewhat relinquish the right to aspire to, or claim, the returns that a stockpicker might have achieved.

There are times when passive indexing is favorable, but the past two years have not been one of them, as many major indices have remained relatively flat.

Over the past 12 months, the SPY (including dividends) yielded a 6% return, while Microsoft (MSFT) saw a 26% increase and Nvidia (NVDA) recorded an impressive 109% growth.

During a 24-month period starting from June 5, 2021, the SPY generated a total return of 4%, while Microsoft experienced a 36% surge and Nvidia soared by 123%.

Once again, we can manipulate our story and statistics to suit our narrative, but if I had adopted a “buy and hold” and “don’t time the market” approach, Microsoft’s outperformance by a factor of 4-8 times is significant, not to mention the gains one could have made by holding Nvidia.

Interestingly, I have noticed that many ETF enthusiasts often quote and admire investors like Warren Buffett, David Tepper, Ken Griffin, and others. However, it’s worth noting that these individuals are stockpickers, not ETF investors.

Just some food for thought amidst the hypocrisy that I frequently come across.

June 6, 2023

by Rob Zdravevski

rob@karriasset.com.au

Insights from Extreme Oversold Conditions: A Closer Look at Rotterdam Coal, China Thermal Coal, and Dutch TTF Gas

During Monday’s trading day, the prices of Rotterdam-delivered coal, China thermal coal, and Dutch TTF Gas each rose by 10%, 10%, and 20% respectively.

These commodities were featured in the “Extreme Oversold” section of my recent weekend edition of Macro Extremes.

Macro Extremes (week ending June 2, 2023)

While it would be preposterous and myopic to claim any seer-like ability or visionary foresight for such an occurrence, I do want to emphasise the validity of the purpose behind my publication.

It aims to raise awareness of the potential for changes in direction once prices have reached extreme ends of their pendulum.

However, it is perverse that these surges don’t necessarily make me happy nor make for constructive price action, as there are now gaps below.

Furthermore, a one-day rise of 20% in Dutch TTF Gas merely sees it trading at the same price as 9 days ago (on May 23, 2023)

Macro Extremes (week ending June 2, 2023)

A weekly Macro, Cross Asset review of prices trading at extremes which may generate future investment ideas and opportunities.

The following assets (on a weekly timeframe) either 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)

U.S. 7 year and 20 year government bond yields 

British 2, 3 and 5 year government bond yields

USD/CNH

USD/SEK

Philadelphia Semiconductor Index (SOX)

Overbought (RSI > 70)

U.S. 3 month government bond yield

Russia’s MOEX index

Nasdaq 100

Nikkei 225

USD/ZAR

Uranium 

Cattle

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

Taiwan’s TAEIX Index

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

Australian 10 year minus 2 year bond yields

Greek and Swiss 10 year bond yields

EUR/GBP

China Coal

CSI 300 equity index

Oversold (RSI < 30)

LNG Japan Korea Marker (JKM)

Lithium Hydroxide 

Dutch TTF Gas

Urea (both U.S. Gulf and Middle East prices)

Soybeans

Jakarta equity index

The Oversold Quinella – Both Oversold and Traded at < 2.5 standard deviations below the weekly mean)

Rotterdam delivered Coal

Notes & Ideas:

Equity Indices were generally higher with the U.S. indices being the notable leaders.

As preempted in past weekly commentaries, equities are broadly making recent ‘higher highs’ (as the S&P 500 did this week, traction at 

This price action is adding to the momentum of some but not all, nor are all trends showing particular strength.

Those yet to join the party include the transports, the mid and small caps.

The Nasdaq Composite has strung together 6 consecutive rising weeks (totalling to gains of 12%) while the Nikkei 225’s winning weekly streak has now reached 7. 

Both feature in the Overbought category of this week’s list and are visiting this area for the first time since November 2021 and March 2021, respectively.

The beleaguered U.S. Regional (KRE) Bank Index has recovered 15% since it registere an oversold reading 3 weeks ago.

While China’s CSI 300 equity index makes a visit to that region for the first time in 14 months.

For the week, the ASX 200 fell 0.1% and the ASX Small Caps rose 0.8%.

Government bond yields were mainly lower except for Australia.

Yields declined enough for those British 10 year gilts to no longer be overbought.

TLT (U.S. 20 year bond ETF) isn’t oversold this week as bond yields rose while the U.S. 5 year minus U.S. 5 year inflation break-even rate isn’t at overbought extremes.

Although it is worthy to note the divergence between the bond buyers and those driving equity indices higher.

Brazil yields have been trending lower, having declined from 13.6% to 11.4% over the past 2 months. This remains relevant because Brazil was amongst the first central banks to start their hawkish inflation strategy, being almost a year before any G7 nation did so.

The Australian 10 year minus 2 year bond yield spread registered an oversold reading. This week was its lowest close since October 2010. Preceding that, the same percentage was seen in September 2008. 

The U.S. 3 month yield extended its highest close “in this cycle” at 5.38%. 

The last time one could’ve earned this interest rate was 23 years ago on January 1, 2001.

Commodities were mainly weaker across the broader energy complex offsetting gains seen in livestock and the ‘softs’.

Mimicking last week, Coal, Gas, Shipping rates and Urea were amongst the notable decliners, with the latter sinking 23% over the past 2 weeks.

While JKM LNG broke its 6 week losing streak it remains close at its lowest point in 3 years.

Natural Gas has fallen 17% in the past 2 weeks and is gaining my interest.

Over the past 3 weeks, the Baltic Dry Index has tanked 49% and has mounted a 4 week losing streak.

Sugar is experiencing 5 consecutive weeks of lower closes while Dutch TTF Gas has declined 50% during it 9 week losing streak. Acutely, it has slumped 30% over the past 3 weeks.

Copper bounced off its oversold extremes and Platinum fallen 13% from its high seen in late April 2023. 

In Currencies the AUD firmed while the EUR was weak

The larger advancers over the past week comprised of;

Rotterdam Coal 2%, Lean Hogs 14%, Cattle 5.4%, Lithium 6.3%, Tin 4.9%, Cotton 3.2%, Uranium 2.1%, Rice 3.6%, KBW Bank Index 3.1%, DJ Industrials 2.2%, DJ Transports 1.8%, HSCEI 1.5%, Nasdaq Composite 2%, KOSPI 1.7%, S&P MidCap 400 2.6%, Nasdaq Biotechs 1.9%, Nasdaq 100 1.7%, Nikkei 225 2.1%, Russell 2000 3.3%, S&P SmallCap 600 3.3%, S&P 500 1.8% and the KRE Regional Bank Index climbed 4.8%.

.

The group of decliners included;

Australian Coking Coal (2%), Baltic Dry Index (22.6%), China Coal (16.8%), Hot Rolled Coiled Steel (14.5%), Natural Gas (10.1%), Orange Juice (4.1%), Platinum (2.4%), Gasoline (3.5%), Sugar (2.5%), Dutch TTF Gas (5.4%), Urea U.S. Gulf (8%) and Malaysia’s KLSE equity index eased 1.6%.

June 4, 2023

by Rob Zdravevski

rob@karriasset.com.au 

Macro Extremes (week ending May 26, 2023)

A weekly Macro, Cross Asset review of prices trading at extremes which may generate future investment ideas and opportunities.

The following assets (on a weekly timeframe) either 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)

U.S. 20 year government bond yields 

U.S. 5 year minus U.S. 5 year inflation break-even rate

Chilean equity index

Overbought (RSI > 70)

Russia’s MOEX index

Nasdaq 100

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

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

Australian 3 month bank bill yield (90 day swap rate)

U.S. 3 month government bond yield

Nikkei 225

Philadelphia Semiconductor Index

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

TLT (U.S. Treasury 20+ year bond ETF)

CSI 300 equity index

Copper

Soybeans

Oversold (RSI < 30)

LNG Japan Korea Marker (JKM)

Lithium Hydroxide 

Dutch TTF Gas

Rotterdame delivered Coal

KRE Regional Bank Inde

ZAR/USD

The Oversold Quinella – Both Oversold and Traded at < 2.5 standard deviations below the weekly mean)

None

Notes & Ideas:

Equity Indices mainly experiencedlower prices but they were eclipsed by the noisy gains in tech stocks and rebounding U.S. banks.

Beside the list of notable gainers and decliners below, the Dow Jones Industrials fell 1%, the MidCap 400 eased 0.5%, the SmallCap 600 and Russell 2000 eeked a 0.1% gain with the S&P 500 rising 0.3% for the week.

This past week, some equity markets did make a new ‘higher high’. Markets still have a propensity to ‘rip’ higher.

The Nasdaq 100 and the SOX both registered an overbought extremes for the first time since November 2021 while the Nikkei 225 last visited this area in March 2021.

The SOX Index has now risen 18% in the past 2 weeks, the U.S. Regional Bank Index has climbed 11% and the Nasdaq 100 firmed 7% over the same time whilst the S&P 500 is still hovering around the same price as January 2023.

For the week, the ASX 200 fell 1.7% and the ASX Small Caps fell 2.9%.

Government bond yields generally rose (except for Brazil and Türkiye) again and are trending higher. So, I ponder if they make a double or triple top. I’ll watch for ‘higher highs’.

The Australian 10 year minus 2 year bond yield spread is nearing an oversold reading. This week was its lowest close since October 2010. Preceding that, the same percentage was seen in September 2008. 

All the durations of British Gilts are overbought. 

The U.S. 3 month yield has seen its highest close “in this cycle” at 5.32%. 

The last time one could’ve earned near this interest rate was when it traded at 5.14% in February 2007.

Before that, it traded at 5.38% on January 1, 2001. Merely, 23 years ago.

Brazilian 10 year bond yields are nearing oversold territory but more relevant is that the yield has eased from 13.6% to 11.6% over the past 3 months.

Relevant because Brazil was amongst the first central banks to start their hawkish inflation strategy.  

Commodities were broadly weaker while oil and softs bucked the trend firming through the week. 

Coal, Urea, Gas and Shipping rates were amongst the notable decliners.

JKM LNG continues to close at its lowest point in 3 years and Australian Coking Coal finally mean reverted.

Dutch TTF Gas entered weekly oversold territory for the first time in 3 years.

Cocoa and Sugar are no longer overbought.

Nickel has now fallen 13% over the past 3 weeks and Silver has declined 10% over the same time. Whilst over the past 2 weeks, the Baltic Dry Index has tanked 26%, Dutch TTF Gas slumped 25% and JKM LNG has sunk 17%. Inversely, Orange Juice has climbed 20%.

Currencies 

The AUD lost 2% of its value against the USD and it was weak against everyone else including the Rupiah and Rupee.

Inversely, the USD saw strength. Recall those media reports (once again) about the death of the U.S. Dollar.

The Malaysian Ringgit is nearing an Oversold moment agains the USD.

The South African Rand closed at lowest historical price versus the USD and the AUD.

The Chinese Yuan is weaker as it nears an oversold reading.

The larger advancers over the past week comprised of;

WTI Crude 1.4%, Orange Juice 13.1%, Brent Crude 1.7%, Corn 8.9%, Oats 6.6%, Soybeans 2.3%, Wheat 2%, MOEX 2.1%, Nasdaq Composite 2.5%, SOX 10.7%, TAIEX 2%, KRE 2.8% and the Nasdaq 100 rose 3.6%.

.

The group of decliners included;

Australian Coking Coal (2.1%), Aluminium (2.5%), Rotterdam Coal (16.6%), Baltic Dry Index (15.3%), Cocoa (2.5%), China Coal (4.3%), Iron Ore (2%), Lean Hogs (8.4%), JKM LNG (6.2%), Coffee (5.4%), Natural Gas (6.5%), Nickel (2.5%), Palladium (6.6%), Platinum (4.4%), Silver (2.9%), Cotton (3.9%), Dutch TTF Gas (17%), Urea U.S. Gulf (14.9%), Urea Middle East (9.7%), Lumber (2.9%), Shanghai (2.2%), CSI 300 (2.4%), CAC (2.3%), DAX (1.8%), MIB (2.9%), HSCEI (4%), Hang Seng (3.6%), Nasdaq Biotech’s (2.6%), TSX (2.1%), KLSE (1.8%) and the FTSE 100 fell (1.7%).

May 28, 2023

by Rob Zdravevski

rob@karriasset.com.au 

Energy correlations & buying moments

Followers would recall my notes about peaks and mean reversion calls in various assets including energy.

I’ve been bearish on energy prices soon after the Russian/Ukraine war commenced.

Middle East Urea prices have mean reverted, falling from $900 to $290.

The Japan/Korea Market (JKM) LNG price has tanked from $68 to $9.

Now, I am preparing to buy and am becoming bullish on energy prices again.

The first chart attached chart shows the correlation between Urea and JKM LNG.

These correlations extends across many other commodities, stock prices and currencies. 

The next chart is the Rotterdam Coal price compared to the JKM LNG price.

Lows in selected energy prices are likely be “put” in before the majority realise it.

Other energy prices such as Heating Oil, Crude and Distillates still have some lower travel before they bottom.

The 3rd chart in this series perversely compares the Dutch TTF Gas price to that of Wheat.

Remember when the financial media were reporting about these energy prices in recent months, after they had already tripled and on their way to peaking?

May 28, 2023

by Rob Zdravevski

rob@kariasset.com.au