Macro Extremes (week ending March 26, 2021)

During the past week, the following assets (on a weekly timeframe) registered an Overbought reading or traded more than 2.5 standard deviations below its rolling mean.

No assets (securities) in my immediate universe touched the other side of the extreme being Oversold (where the RSI is < 30) or were at least 2.5 standard deviations below its mean.

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

USD/TRY, meaning the Turkish Lira weakened notably.

Overbought (RSI > 70)

Canadian 10 year bond yields

U.S. Government 5 & 10 year bond yields (for 6th consecutive week)

Aluminium (for 5th consecutive week)

Lean Hogs (reaching their highest price since October 2014)

Copper (and on a longer-term ‘Monthly’ basis, it’s at most overbought since September 2006)

Corn

Soybeans

USD / JPY

U.S. KBW Banking Index (4th consecutive week)

Nasdaq Transportation Index

S&P Mid Cap 400 (3rd consecutive week)

Sweden’s OMX 30 Index

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

Dow Jones Transport Index

Notes & Ideas:

There are many trade ideas to extract from the list such as an expected mean reversion in Aluminium, Copper and Pork prices which would benefit product manufacturers as falling prices would improve their margin (lowering ‘input’ costs) while Aluminium producers, Copper miners and Pig farmers should lock in their gains as prices are hitting extended peaks.

Weekly readers would’ve noticed Corn and Soybeans have also been in the ‘extreme high’s’ list for the past few weeks.

A decline and mean reversion in Corn would be welcomed news for cereal makers such as Kellogg.

Lower soybean prices means poultry farmers get to buy cheaper soybean meal, of which their industry consumes 60% of it, as feed.

Some other macro ideas are;

Buy U.S. 5 & 10 Year Bonds (expecting prices to rise and yields to fall)

Sell USD / Buy Yen (there are some interesting Japanese equity ideas in my equities universe)

Specific stock and other ideas are being sent to clients over the weekend.

Many of the recently ‘Overbought’ bonds, commodities, currencies and equity indices have now eased away from those extremes readings.

The Russell 2000 was hitting such extremes 2 weeks ago and has since declined 5%. 

I think the Mid-Cap 400 and , U.S.  banks & Transports are next to pullback.

Tin, the Nikkei 225, the CRB Index, AUD/JPY have also fallen from those Overbought levels.

Wheat has declined 10% and Natural Gas more so, since their “quinella’ readings 6 weeks ago.

And most notably, Australian, UK & Korean bond yields have fallen 5%-10% for the week.

The spread between the 2 year and 10 year bond yield continues to widen, now sitting at 1.53%, something not seen since September, 2015.

Although the bigger macro story is not the ’steepening’ of the yield curve, it is more so that 10 Year bond yields have Quadrupled in the past 12 months, as described in a recent thesis.

The crowded trade is to Short 10 year Government Bonds. I like the opposite with my preference being to Buy the 5 Year bond.

And, Bitcoin is trading at 428% above its 200 Weekly Moving Average, down from last week’s 448% reading.

March 28, 2021

by Rob Zdravevski

rob@karriasset.com.au