Readers of my weekly ‘Macro Extremes’ note may deduce that the following are Overbought and ’Stretched”
Cotton (up 50% in 4 months)
Rice (up 22% in 4 months)
Corn (up 36% in 4 months)
Natural Gas (Henry Hub price) has soared 117% in 3 months
These higher prices are good for the producers and onerous for the buyers of the raw material.
However, the contrarian thinks about what the story looks like when things change and move in the opposite direction.
For those who chased the news and fearfully bought something at the wrong end of the pendulum, you may be surprised to know that since the week surrounding February 28th – March 7th, 2022 (Ukrainian invasion)……
Wheat is 25% lower (remember how the lack of Ukrainian wheat was going to send prices higher ‘forever’?)
Aluminium is 24% lower
European delivered (Dutch TTF) Natural Gas has slumped 55%
Palladium has declined (Russia has 40% of the global reserves)
Crude Oil is 18% weaker
the Japanese Korean LNG Marker has fallen 54%
Lumber has swooned 34%
Nickel has tanked 50% from its March intraday high
and Hot Rolled Coiled Steel is 20% lower than its September 2021 high.
Interestingly, the Baltic Dry Index has ‘only’ risen 20% since the early March news of supply disruptions and port chaos in Shanghai arose.
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)
Istanbul’s BIST Index
Overbought (RSI > 70)
Australian 2, 3, 5 & 10 year government bond yields
Canadian, Spanish, French, Greek, British, Italian, Korean, Swedish, Portuguese, New Zealand & Swiss 10 year government bond yields
German 2, 5 and 10 year yields
U.S. 2, 5 & 10 year yields
TBX & TBT
CRB (Commodities) Index
Corn
Rice
Cotton
Orange Juice
AUD/JPY
The Overbought Quinella – Both Overbought and Traded at > 2.5 standard deviations above the weekly mean)
U.S. Dollar Index (DXY)
Heating Oil
USD/JPY
Extremes “below” the Mean (at least 2.5 standard deviations)
Cattle
NZD/USD
SGD/USD
Taiwan’s Taiex index
Oversold (RSI < 30)
TLT
IEF
China’s CSI 300
JPY/AUD
HKD/USD
The Oversold Quinella – Both Overbought and Traded at > 2.5 standard deviations above the weekly mean)
FXE
GBP/USD
EUR/USD
CNH/USD
KRW/USD
Shanghai Composite
Notes & Ideas:
This past week’s big news remains the same. Bonds and Currencies.
Other observations include;
UK Gilts aren’t overbought anymore,
Bitcoin has broken a support line,
The Copper/Gold Ratio closed the week (it’s lowest weekly close since January 24th) at an important support line. (In Monday’s trade, it has broken below this),
The Japan/Korean LNG Marker is at its lowest price since February 14th,
We saw a bearish outside reversal week in the AUD/GBP,
The Euro has reached its most oversold level (on a monthly basis, not my usual weekly timeframe) since 2015,
The AUD/JPY is not overbought anymore,
while the AUD/USD flaunting is support line,
The mean reversion of those FAANGM’s has reached halftime.
There are places to hide, the CAC only fell 0.7% for the week, Italy’s MIB and Singapore’s Strait Times Index declined a mere 0.1%, the Nikkei was down 0.9% and the ASX 200 barely eased 0.5%,
A 13.3% swoon in the Nasdaq 100 over the past 4 weeks and it’s still not oversold.
Natural Gas recovered last week’s decline of 11%,
the price of Urea slumped 19%
and Precious Metals fell while major equities indices did the same. Last week’s edition of ‘Macro Extremes’ signalled this citing their bearish outside reversal price action.
The larger advancers over the past week comprised of;
Baltic Dry Index 4.2% (adding to last week’s 8% rise), Heating Oil 21.4%, Australian Coal 11.4%, WTI Crude Oil 2.6%, U.S. Dollar Index 2.1%, Gasoil 9.7%, Gold Volatility Index 4.5%, Natural Gas 10.9%, Orange Juice 2.5%, Gasoline 4.2%, Cotton 7.2%, Dutch TTF Gas 4.8%, Corn 2.6%, Rice 5.6%, HSCEI 4.7%, Hang Seng 9.5%, Russia’s MOEX 9.5%.
The group of decliners included;
Aluminium (4.8%), Rotterdam Coal (20.4%), Lean Hogs (9.8%), Copper (3.8%), Hot Rolled Coil Steel (4.4%), JKM (3.8%), Coffee (2.2%), Lumber (2.2%), Cattle (6.9%), Tin (6.3%), Palladium (2.9%), Silver (4.9%), Urea (19.1%), Uranium (2.1%), Gold in USD (1.8%), Oats (9.5%), Wheat (1.8%), Bitcoin (3.8%), KBW Banking Index (5.2%), Dow Jones Industrials (2.5%), Bovespa (2.9%), S&P Midcap 400 (3.2%), Nasdaq (3.8%), Oslo (1.9%), Russell 2000 (4%), SOX (2.3%), S&P 500 (3.3%) and the Taiex fell 2.5%.
May 2, 2022
(written 2 days later than usual, better late than never)
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)
China Coal
Rice
Natural Gas
Orange Juice
Overbought (RSI > 70)
Australian 2, 3, 5 & 10 year government bond yields
Canadian, Spanish, French, Greek, British, Italian, Korean, Swedish, Portuguese, New Zealand & Swiss 10 year government bond yields
German 2, 5 and 10 year yields
U.S. 2, 5 & 10 year yields
U.S. Dollar Index (DXY)
TBX
CRB (Commodities) Index
Corn
AUD/JPY
The Overbought Quinella – Both Overbought and Traded at > 2.5 standard deviations above the weekly mean)
TBT
Istanbul’s BIST equity index
USD/JPY
Extremes “below” the Mean (at least 2.5 standard deviations)
None
Oversold (RSI < 30)
TLT
IEF
China’s CSI 300
Shanghai Composite
JPY/AUD
HKD/USD
The Oversold Quinella – Both Overbought and Traded at > 2.5 standard deviations above the weekly mean)
JPY/USD (for the 7th week)
Notes & Ideas:
This pst week’s big news is the same as the last 3 or 4 weeks: the bond market and their overbought status.
Moreover, we saw yields lurch 15-20 basis points higher in many 10 year bonds. Some example include Portugal’s 10’s moving from 1.85% to 2.00% or the U.S. 10’s moving from 2.82% to an intra-week high of 2.98%.
JGB’s made a new high, perhaps suggesting the ‘risk-on’ world is OK.
Precious Metals saw weakness and featured amongst the bearish reversals listed below.
Some currencies moved 2% which isn’t a range normally seen in a weekly term.
In other news, last week’s 26% rise in Natural Gas saw it give up 11% this week and commensurately, the JKM tanked 23%. Other energy commodities also fell while the price of Uranium took a break from its recently reported Overbought Extremes by falling 14%.
We saw constructive price action in the Copenhagen, Oslo & Helsinki equity indices, while the S&P 500 has fallen 6.2% and the Nasdaq 100 has declined 10.5% over the past 3 weeks.
And lastly, we saw bearish outside reversal week in Gold, Silver, Copper, Orange Juice, Platinum, the S&P 500, the Dow Jones Industrials, SOX, MIB, KBW Bank Index, Nasdaq, Russell 2000 and the SOX.
The larger advancers over the past week comprised of;
Baltic Dry Index 8%, Heating Oil 2.2%, Lumber 14.4%, Rice 2.2%, EURAUD 2% and Dow Jones Transports rose 1.5%
The group of decliners included;
Australian Coal (3%), Bloomberg Commodity Index (2.6%), Cocoa (3.1%), China Coal (10.6%), WTI Crude Oil (4.6%), Gold (2.1%), Copper (3%), Japan Korean ‘LNG” Marker (22.6%), Natural gas (10.5%), Orange Juice (2.8%), Platinum (6.7%), Gasoline (2.2%), Rubber (1.6%), Sugar (4.1%), Silver (5.6%), Cotton (4.3%), CRB Index (2.5%), Brent Crude (4.5%), Uranium (13.7%), Oat (5.1%), Wheat (2%), AUDUSD (2%), NZDUSD (1.9%), CNHUSD (2.3%), JPYUSD (1.7%), ZARUSD (6.9%) and Australia’s ASX 200 fell 0.7%.
In a continuation of my Alcoa post earlier today, Newmont Mining’s stock price is now dancing at ‘extremes’ not seen for some time.
The first chart below is an illustration of the various times that Newmont’s stock price has traded at high levels of percentage above its 200 weekly moving average.
Other than the shocks of the respective 1981 interest rate hikes and the 1987 stockmarket crash, Newmont Mining’s stock price doesn’t necessarily spend time up in this stratosphere.
My case is not a one-way street.
Note the highlighted ellipse in the chart surrounding 2003 and 2005.
Newmont trades at 101% above its 200 WMA in the last part of 2003, then attempts a mean reversion to then rise back to the same stock price, YET the percentage reading is ‘only’ 57%.
This is because the 200 WMA ‘rolls up’ quickly to catch up with the parabolic move seen through 2003.
The 200 WMA will move higher, while NEM stock price declines.
This is the convergence that I mention in the previous Alcoa post.
So, I’l look for Newmont’s stock to work its way back to the $64-$68 mark in the coming 9-13 months.
The second chart compares Newmont to the Gold price (in USD).
Similar to Alcoa, it’s plausible that Newmont uses its well priced equity to make some acquisitions or raise some capital itself.
On the eve of last quarter’s earnings season (on January 26th, 2022) I wrote a newsletter citing Alphabet (Google’s) earnings as being important and setting the course for technology stock price action.
The charts contained within that newsletter featured some support lines that some of the FAANGM stocks were still holding above.
Google has now broken below that support line as has Microsoft, while Apple remains barely above its.
My previous quips have mentioned the weighted importance that these stocks have in the Nasdaq 100 and S&P 500. The recent pullback of these goliaths (following their dead cat bounce) explains the 7% decline in the Nasdaq 100 over the past 3 weeks.
Alphabet (Google) reports earnings April 26th.
Apple reports on April 28th.
There is good probability that these stocks fall further, much like other high-flyers have and some of their FAANGM brethren.
Mean Reversion is a big theme of mine and it is a warning to heed in a market (and world) which thinks prices only travel in a one-way direction.
Whilst valuation and fundamentals matter and the pricing of an asset already takes that into account, the price action of the asset is something else to observe when ‘animal spirits’ sends it to the edges of its normal trading range or price distribution.
So, in Alcoa’s case, it is difficult to convince one self to buy the shares at this level.
And if you do, at least recognise that you may be the marginal buyer.
In the chart below, you’ll see Alcoa is stretched above a significant long term measure that I use, being the 200 Week Moving Average.
This is one study I use to illustrate moments of ‘extremes’.
Alcoa has never traded at 220% above its 200 week moving average.
In fact, a price which is 60% above (or below) its 200 week moving average is about the extent of the equity price ‘elastic’.
So, what’s next;
Although the current 200 week moving average is currently at $31, its not so clear to expect the price of Alcoa shares to simply fall and mean revert to that level.
The recent parabolic price move means that this mean will “roll higher” at a reasonably faster pace than normal.
We should see the price of Alcoa and its 200WMA converge to somewhere near the $55 mark.
This also suggests holders of Alcoa stock manage their risk (i.e. selling, hedging)
From a corporate perspective, it’s prudent for Alcoa to use its ‘inflated’ currency (being its shares) to either raise capital, restructure debt or to make acquisitions.
The following assets (on a weekly timeframe) registered an Overbought reading or traded more than 2.5 standard deviations above its rolling mean.
Extremes “above” the Mean (at least 2.5 standard deviations)
U.S. Dollar Index (DXY)
Overbought (RSI > 70)
Australian 2, 3, 5 & 10 year government bond yields
Greek, Spanish, French, Italian, British, Swedish, Portuguese, New Zealand, Swiss, Canadian & Korean 10 year government bond yields
German 5 and 10 year yields
U.S. 2, 5 & 10 year yields
Bloomberg Commodity & CRB Index
Cotton
Uranium
Corn
AUD/JPY
TBX
The Overbought Quinella – Both Overbought and Traded at > 2.5 standard deviations above the weekly mean)
TBT
U.S. 10 year minus German 10 year bond yield spread
China Coal
Natural Gas
Orange Juice
Istanbul’s BIST equity index
USD/JPY
Assets (securities) which 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 are;
Extremes “below” the Mean (at least 2.5 standard deviations)
None
Oversold (RSI < 30)
TLT
IEF
China’s CSI 300
JPY/AUD
HKD/USD
The Oversold Quinella – Both Overbought and Traded at > 2.5 standard deviations above the weekly mean)
JPY/USD
Notes & Ideas:
The big news for the week remains in the bond market.
Major government 10 year bond yields are overbought. The oversold levels of the Bond ETF’s are helpful tools to use to confirm this overbought bond yield status.
Such overbought levels in the U.S. 10 year are notable that it has never been so, in the 40 years of data appearing in the chart below. It’s so meaningful, that the chart below is a Monthly chart and not my normal series of Weekly charts.
The inverted U.S. yield curve inverted I son longer news. As I wrote last week, “Much noise (once again) for not much substance. Curves needs to invert more than a few days before probability stacks up for a future recession call.”
Last week, I also cited a bullish outside reversal in the yield curves.
Pundits are commenting that the Stockmarket doesn’t seem to care about the rising yields which implies danger, as the bond market is something we tend to respect more than equities.
In a future post, I’ll discuss the reason for this, where I’ll illustrate real yields being more relevant than nominal yields, especially when compared to the earnings yield of equities.
Furthermore, this post, talks about my take on the yield curve
In short, the S&P 500 rallied for 15-20 months after than inversion but I think the added weight to an advance in the equities market is summarised in the last paragraph of that newsleter.
It’s the quantum of the rate rise that is fascinating.
In the real world, if your mortgage repayments double and corporate debt repayments triple and the servicing of government interest quadruples, surely some pressure will be felt.
Nonetheless, the chart below of the U.S. yield curve will be good to keep handy.
The circles denote moments when the curve (the spread) broke above a notable downward sloping trendline which happened to coincide with a peak in the S&P 500 occurring within the next month or so.
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