Macro Extremes (week ending July 29, 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)

None

Overbought (RSI > 70)

None

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)

Japanese government 10 year bond yield

Sugar

Oversold (RSI < 30)

U.S. 10 year minus U.S. 5 year government bond yield

U.S. 5 year minus 3 month government bond yield

Australian Coking Coal (it also reverted to its 200 week moving average)

Hot Rolled Coiled Steel

Tin

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

None

Notes & Ideas:

This past week’s big news was the continued and stronger rally in equities and the notable absence of oversold commodities and currencies from the list. They have all ventured away from their recent ‘extremes’.

The list below highlights those with the larger weekly percentage rates of change.

Extreme measures were telling us to expect a bounce. Recent editions of ‘Macro Extremes’ and my blog posts flagged oversold extreme lows in various equity indices (and some commodities and currencies) since June 13, 2022.

In fact, last week’s ‘Macro Extremes’ re-visited that point.

Those equity indices have risen between 6% and 15% over the past 6 weeks.

Some examples include Amsterdam’s AEX rise of 13%, the Russell 2000, Nasdaq and MidCap 400 have risen in the vicinity of 14% while Switzerland’s SMI and Australia’s ASX 200 have improved 7%.

Specific stocks have been more impressive. Rockwell Automation and Nucor have risen 25% in only 4 weeks.

I also found it interesting that the Nasdaq Biotech Index only rose 0.2% for the week. Although that index is 17% above its mid- June low, it has eased 4% from its recent high, 3 weeks ago.

My work suggests that this ‘trading’ bounce in many markets, assets and securities may see an end in the first couple days of the coming week.

The recent market advance has been a combination of a ‘bounce’ occurring once prices satisfied a host of mean reversions and extremes, coupled with notable pessimism and bearish investor readings along with short covering and ‘benchmarking’.

Because when mature, large index weighted Goliath’s such as Apple and Amazon rise 20% over a 4 week span, benchmarked money managers need to buy (chase) those and other stocks which are trending higher, in order to stay close to the index returns and the performance of their competitors.

Many fund managers have expressed a view to me over many years, similar to, “it sucks being benchmarked”.

But if you did benefit from the ‘fat part of the trade, let’s sell and pack up for the rest of the year and go on holiday?

After all, that is more than a year’s adequate return all within 30 days. 

Alas! Many of us won’t do that. It wouldn’t be fun (sic) until we squandered half of those gains, which then keeps us at the table for the rest of the year.

In all seriousness, there are many gap-up’s that markets will back and fill.

The setup in the weeks ahead should be a safer moment to accumulate for those longer-term investors.

The U.S. yield curve remains inverted for the 5th week in a row and oversold for 3 consecutive weeks while the U.S. 5 year minus 3 month yield spread also remain oversold.

I’ve also got some work do in the LNG and Gas market this week. Specifically, the Dutch TTF Gas price rose 20% on the week and now has seen a 130% rise (from EUR 83 to EUR 191) over the past 7 weeks.

Incidentally, Brent Crude Oil eked a gain of only 0.03% which is a contrast to other rallies in the energy complex.

While Copper and Silver rose 7% and 9% respectively for the week, after being entrants in the previous week’s oversold categories. Copper has risen 13% from its fortnight intra-day low.

Furthermore, during the week, the AUD Silver reached my Buy price of $26.50. It closed Friday’s trading 10% higher at $29.12.

In currency land, the Chilean Peso strengthened 5.2% (I’ll write about that later in terms of a Copper trade) and the Japanese Yen firmed 2% against the USD, which added to last week’s 2% rise.

Bond yields continue to fall meaning that the bond buyers were the more aggressive, as yields are other longer journey to mean revering.

For example, the Australian 2 year bond yield has fallen from 3.60% in the past 4 weeks to 2.57%. I think, it’s plausible that it works its way down to the 1.55% mark over the coming months. 

More on this in an another note which will be based on the higher probability of sharper retracements and mean reversions being seen following parabolic price moves.

Since those lows in equities around June 13-16, 2022, we have seen a peak in bond yields such as the French 10’s declining from 2.48% to 1.39% and the German 2’s have fallen from 1.30% to 0.27%.

What if the German 2’s or the Swiss 10’s go back to a negative yield?

Good for technology stocks perhaps? 

While a major ‘short trade’ in government bonds has made many a sizeable fortune over the past 18 months, staying ‘short forever’ has also become known as the ‘widow maker trade’ where many have lost fortunes especially in the case of shorting Japanese 10 year bonds.

A possible or ‘pending’ mean reversion in bond yields is bigger deal than the one currently occurring in the equity market. I feel a seperate blog post is required for this topic.

The larger advancers over the past week comprised of; 

Bloomberg Commodity Index 4.6%, WTI Crude Oil 4.1%, Gasoil 3.7%, Gold 3.2%, Copper 6.7%, JKM LNG 7.5%, Coffee 3.5%, Heating Oil 4.9%, JKM LNG 8.3%, Coffee 5.1%, Orange Juice 12.5%, Palladium 5.5%, Platinum 2.6%, Silver 8.5%, CRB Index 3.9%, Cotton 3.7%, Dutch TTF Gas 19.4%, Urea Florida Gulf 16.4%, Urea Middle East 19.9%, Silver in AUD 8.4%, Silver in USD 9.4%, Corn 9.2%, Oats 2.8%, Soybeans 11.6%, Wheat 6.4%, AEX 3.5%, KBW Banks 2.2%, CAC 3.7%, DAX 1.7%, Dow Jones Industrials 3%, DJ Transports 5.8%, MIB 5.6%, Bovespa 4.3%, MOEX 5.6%, Kospi 2.4%, S&P MidCap 400 4.9%, Nasdaq 100 4.5%, Sensex 2.6%, Oslo 4.1%, Copenhagen 3.1%, Helsinki 3%, Stockholm 2.7%, Russell 2000 4.3%, SOX 4.4%, S&P 500 4.3%, FTSE 100 2%, Australia’s ASX 200 2.3%, Istanbul 2.3%, Toronto’s TSX 3.7%, S&P SmallCap 600 4.7% and the Nasdaq Composite soared 4.7%.

The group of decliners included;

Australian Coking Coal (19.2%), Baltic Dry Index (11.7%), Hot Rolled Coiled Steel (7.4%), Lumber (9.9%), LNG (6.6%), Gasoline (3.4%), Sugar (2%), CSI 300 (1.6%), HSCEI (3.1%) and the Hang Seng Index fell 2.2%.

July 30, 2022

by Rob Zdravevski

rob@karriasset.com.au