Identifying parabolas and then mean reversion – the story of 2022

The most dominant words in my posts throughout 2022 were “parabola” and “mean reversion”.

Perhaps they appeared ad nauseam but it was were the action was……and the action was to recognise them and stay away.

The skilled (and brave or stupid) may have chosen to see them as shorting opportunities.

None of these calls and warnings will show up directly in anyone portfolio performance. It’ll just be something that we just wink at each other acknowledging that we saw what has going on.

An addendum to my studies covering this broader theme included references to the percentage an asset’s price was trading above its 200 day or 200 week moving average.

It all helped identify the rare air where prices were flying up to.

Since then, there has been much damage to investors, speculators and corporations.

Stay tuned for some examples of damage and mean reversion.

In the coming months, I think we will see prices continue to digest recent moves, produce a few more spikes and head fakes dragging in new participants while incumbent holders cling to new hope of breaking even.

Any new waves of weakness in prices (because markets are cruel) will see various speculators throw their weak hands in.

December 22, 2022

by Rob Zdravevski

rob@karriasset.com.au

Oversold AUD/JPY equates to buy signal for S&P 500

Another study to watch when looking for a notable low in the equity market.

When the AUD/JPY touches oversold on a weekly basis, ’tis tends to be an attractive accumulation moment in the S&P 500.

Perhaps we are approaching the 6th occurrence to be seen over the past 30 years.

December 20, 2022

by Rob Zdravevski

rob@karriasset.com.au

In focus – Copper/Gold Ratio

Time to watch the Copper/Gold Ratio again and how it relates to the stockmarket and invariably the health of the economy, the direction of GDP, bond yields and even the price of Copper.

The chart below overlays the Copper/Gold Ratio with the S&P 500 along with a couple support and resistance lines thrown in.

December 19, 2022

by Rob Zdravevski

rob@karriasset.com.au

Macro Extremes (week ending December 16, 2022)

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) 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)

Chinese 10 year government bond yields

Silver

Sugar

Overbought (RSI > 70)

German 2 year government bond yields

Cattle

Istanbul’s BIST Index

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)

U.S. 10 yer bond yield minus German 10 year bond yield spread

Brent Crude Oil

BOVESPA

Oversold (RSI < 30)

Hot Rolled Coil Steel (HRC)

U.S. 5 year yield minus U.S. 3 month bill yield spread

Chilean 10 year bond yield

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

None

Notes & Ideas:

The big news for the week was that Brent Crude Oil touched the lower of its standard deviations extreme.

After being bearish for 12 months, Oil is nearing a Buy signal.

Otherwise, we saw European government bond yields rise (ECB President Lagarde scared them with rhetoric), while U.S. bond yields fell.

Moreover, the U.S. series of bond yields started making newer, recent lows and I found it interesting to see the U.S. 10 year breakeven inflation rate fall to 2.13%, which is its lowest since January 2021. This is down from its 3% April 2022 reading,

Meanwhile the Korean 10’s are marching closer towards a long term mean reversion as is the price of Gasoline.

The Baltic Dry Index has risen 28% over the past month,

The Nordic bourses joined the weakness seen in U.S. equities, 

Palladium hit a new 52 week low, 

I’m watching the Bovespa and the weaker Real,

the Dow Jones Transport only fell 0.2% for the week,

equally small cap indices aren’t over exaggerating declines in the large caps, 

Hot Rolled Coil Steel remains Oversold for the 25th consecutive week,

Lastly, Nickel isn’t overbought anymore.

The larger advancers over the past week comprised of;

Baltic Dry Index 12.6%, JKM LNG 6.6%, China Coal 2.8%, WTI Crude 4.8%, Gasoil 8.7%, Lean Hogs 5.2%, Heating Oil 11.7%, Coffee 4%, Natural Gas 5.7%, Sugar 2.5%, CRB Index 1.9%, Brent Crude 3.3%, Rice 1.9%, Wheat 2.6%, Istanbul 2.5% and the S&P GSCI Index rose 2.8%.

The group of decliners included;

Aluminium (3.1%), Rotterdam Coal (10.2%), Iron Ore (1.8%), Copper (3%), Lumber (6.3%), Nickel (7.6%), Orange Juice (2.3%), Palladium (13.3%), Platinum (3.5%), Dutch TTF Gas (17%), Urea U.S. Gulf (2.6%), Uranium (4.8%), AEX (3.3%), KBW Banking Index (2.8%), CAC (3.4%), DAX (3.3%), DJ Industrials (1.9%), MIB (2.4%), HSCEI (2.9%), HSI (2.2%), IBEX (2.1%), BOVESPA (4.3%), Nasdaq Composite (2.7%), S&P MidCap 400 (2.4%), Nasdaq 100 (2.8%), Stockholm (3.3%), Helsinki (3.9%), Copenhagen (2.6%), Russell 2000 (2.3%), S&P SmallCap 600 (2.7%), SMI (2.7%), SOX (3.1%), S&P 500 (2.1%), TSX (2.5%), FTSE 100 (1.9%), and Australia’s ASX 200 and ASX Small Ordinaries both declined 0.9% for the week.

December 18, 2022

by Rob Zdravevski

rob@karriasset.com.au 

The year end 2022 Newsletter for the coming year

AUD/GBP update and comments

In a mid September 2022 edition of my weekly periodical titled, ‘Macro Extremes’, the AUD/GBP appeared in the quinella overbought section as it sported a simultaneous weekly RSI reading above 70 and it traded to 2.5 standard deviations above its weekly mean.

What made the pending decline (back towards its 200 week moving average) is that it was trading at 10% above that measure.

Things start looking ‘stretchy’ in FX markets at those points.

That trifecta made it difficult to argue that the Aussie Dollar could become any more stronger against the British Pound.

Around about then, was when you sold AUD and bought GBP.

This was when I was advising corporations needing to pay for GBP denominated equipment, to buy Sterling.

Today….its not far away from reverting back to around the 0.5470 mark, as it meanders most likely back to 0.5315 (+ / – 30 basis points) 

When you see the the AUD/GBP at 0.5315, tell your British relatives to convert Sterling into Aussie and send money your way.

Or U.K. corporations may choose to consider cheaper Australian assets.

Look out for upcoming extremes in my weekly (Sunday) publication of Macro Extremes.

December 16, 2022

by Rob Zdravevski

rob@karriasset.com.au

Australian gas prices are no longer market based

Referencing this story and the other links within it,

https://www.afr.com/politics/energy-price-caps-a-free-kick-for-exporters-20221213-p5c5vu

I think that someone in industry lobbied the government and said that ‘we’ can’t afford to pay for high energy (gas) prices.

It may have gone something like this;

Industry said,

“You see, currently we aren’t globally competitive because our cost of labour (unionisation) and employment by-costs are too expensive.

We need help. We can’t cop the higher prices the Europeans are paying. I think you need to put a lid on the gas price that we’d be charged.”

Then Government said,

“OK let’s do that……
Heck, many of the domestic gas providers aren’t even Australian companies.
We’ll use the idea that this is Australian gas for Australia.
But it’s important that the new energy bill which will stop gas companies charging market rates is framed as helping the citizens and curbing inflation.”

And so government resolved that,

From industry we need your donations and
From the population, we need your votes.

Oh dear !

December 15, 2022

by Rob Zdravevski

rob@karriasset.com.au