Long term mean reversions bring opportunities

Here are some quips about mean reversion, knowing when not to chase something and insisting on a bargain, or perhaps ‘buying straw hats in winter’.

There is significance in BHP’s recent pullback,
in the chart below,
see the notable reversion to its 200 week moving average,
note we are taking a long term view here, 
this chart is a weekly chart covering 25 years,
invariably BHP mean reverts,
parabolic moves see mean reversion quicker and savagely,
and often a subsequent resumption of the previous trend,
I don’t see a structural breakdown of the commodity supply complex and demand.

To coincide with a visit to the 200 week moving average,
using Fibonacci calculations (it’s something I use to help pick an entry price),
subjectively, BHP has retraced 62% of the advance from its March 2000 low,
which is another way of weeding out those who bought late into the rally.

And over a slightly longer period,
the chart below tells us that if BHP falls to $34.30,
it represents a 50% retracement of a 6 year advance, 
which started at $14.13 in early 2016,
$34.30 would represent an attractive risk/reward opportunity.

Rio Tinto has a similar analog and story.
I’ll only post a simple weekly chart below, with its 200 week moving average.

Using my mean reversion principles, 
the chart below is a simple example of Wesfarmers,
and when not to chase a stock,
and help identify whether you are being the marginal buyer,
WES has deviated to more than 50% above its 200 week moving average, 
never has it seen such an extreme,
add high valuations and one would be a fool to have been a buyer above $50, 
in fact $50 is where probability suggested selling,
citing the notion that the ‘fat part of the trade’ had been had.

From the book of ‘insisting on a bargain’
and depending on economic landscape and valuations,
I wouldn’t interested buying this stock unless it saw $36-$42,
wait for the mean reversion,
otherwise it may make for a pedestrian investment.

In another example, I’ll show you what the craze in lithium related companies looks like,
here is a chart of Pilbara Minerals (PLS.AX),
it has a market capitalisation of A$6 billion,
it’s trading at stratospheric levels above its 200 week moving average (WMA),
at a current price of $2.05, it is trading at nearly 200% above its 200 WMA
the recent rally resembles a parabola,
don’t be surprised if new investors today end up halving their money in the next several months.

While the next price chart is of a quality gold producing company, 
called Evolution Mining (EVN.AX),
it has a market capitalisation of A$6 billion,
it’s trading at 15% below its 200 WMA,
nobody likes Gold or gold stocks today,
seems like buying a straw hat in winter? 

Also appearing in the unloved category is Chinese equities,
the Hang Seng China Enterprises Index (HSCEI) tracks the performance of major H-shares,
H-shares are Renminbi-denominated shares issued by Chinese companies,
they are listed on the Stock Exchange of Hong Kong, 
which are traded in Hong Kong dollars. 

The HSCEI is trading on a current Price/Earnings (P/E) Ratio of 9,
and its currently 20% below its 200 week moving average.

………just something to think about.

October 1, 2021

by Rob Zdravevski

rob@karriasset.com.au