rob zdravevski's blog

Macro Extremes (week ending May 14, 2021)

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)

Wheat (now 7% below it intra-week high)

Coffee (3rd consecutive week, although it closed 5% below its intra-week high)

Zinc

Lumber (and fell 18% from previous weeks close)

Sugar (down 7% from last week’s close)

Corn (down 12% from last week’s close)

GBP/USD (indicating a strong British Pound against the U.S. Dollar) 

the AUD/USD (where it touched 0.7891

Overbought (RSI > 70)

Italian Government 10 Year Bond Yields (3rd consecutive week)

French & Korean Government 10 year bond yields (2nd consecutive week)

German, Spanish, Portuguese and Canadian 10 year bond yields

The US 10 year minus 2 year yield spread

The Commodities Indices (the CRB and Bloomberg’s)

Aluminium (for 12 consecutive weeks)

Tin (again)

Lean Hogs (for the 13th consecutive week and its highest price since October 2014)

Heating Oil (for 2nd consecutive week)

Gasoline

Gasoil

U.S. KBW Banking Index (11th consecutive week)

Nasdaq Transportation Index  (9th consecutive week)

Dow Jones Transport Index (10th consecutive week)

Sweden’s OMX 30 Equity Index (11th consecutive week)

France’s CAC-40 Equity Index (for the 5th consecutive week) and

Spain’s IBEX



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

Copper (now in its 22nd consecutive week of being Overbought)

Iron Ore (in its 5th week being Overbought, yet 4% below its intra-day high and 11% below last week’s high.)

Soybeans (overbought for 11 consecutive weeks & only 61% above its 200 Week Moving Average) and the;

Canadian Dollar / USD (3rd consecutive week of the quinella, where the CAD is exhibiting strength against the U.S. Dollar)

Assets (securities) within my immediate universe 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)

Nil

Oversold (RSI < 30)

Nil

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

Nil

Notes & Ideas:

The most notable observation is the return of government bond yields into Overbought territory.

importantly I am watching whether U.S. 10 year yields break above 1.75%

Last week the Canadian 10 year bond yields pulled back from their extreme highs (after 11 consecutive weeks ‘above the line’. This week, they have poked back into the Overbought range.

Leaving the Overbought realm were;

the S&P 500 Index (which fell early in the week, yet rose 2.8% from its intra-week low);

the Dow Jones Industrial Average (down 4.3% from its intra-week high) and

S&P Mid Cap 400 (which had a 5.5% intra-week range).

Other notable decliners, albeit they weren’t in extreme territory included;

Taiwan’s TAIEX equity index fell 8.5% (affected by the decline in the semiconductor industry and margin lending unwinding);

and accordingly, the Philadelphia Semiconductor Index which declined 4.2%.

Some energy commodities became overbought this week and WTI Crude and Brent Cruse are very close to doing the same.  

May 16, 2021

by Rob Zdravevski

rob@karriasset.com.au

Extremes and Correlation presentation

Here is a copy of a presentation I was giving in Perth during the week of May 10, 2021.

The purpose of the charts within were to highlight some extremes being seen in the market and also how various assets are correlated to each other.

Higher inflation increases rates and my repayments

Inflation is one of the three major topics consistently raised in meetings over the past 5 months.

What’s the big deal about inflation?

Would you prefer deflation?

Well, we have been in a deflationary phase for years, hence interest rates being so low.

Central banks are tying to flog a dead horse into life (it’s a metaphor, activists don’t write in to me) and now the ‘horse’ seems to be showing some life…

mainly due to industrial disruption and bottlenecks and prices are rising and not necessarily from extraordinary demand.

Can the prices be passed through?

Will customers accept them?

Otherwise ‘produced’ inflation can remain on shelves or in warehouses and it may not be converted to ‘paid’ and accepted inflation.

Inflation is a good thing. Asset prices do rise and it doesn’t mean hyperinflation.

If you are concerned about inflation, own gold and oil.

Do something about it in your portfolios rather than shaking a despairing head akin to waiting for the grim reaper.

The real problem with inflation is that interest rates will rise and if they double from here…..many people will be stressed or wiped out due to the leverage and debt accumulated during the period when central banks were fighting off deflation.

May 13, 2021

by Rob Zdravevski

rob@karriasset.com.au

It’s happening again

I’ll use the words “many” and no one” loosely, generally and for effect.

Many don’t think asset prices which have doubled or trebled in the past 6-10 months can ever mean revert, let alone fall.

Even if the price action resemble parabolas, are trading at historic stretch above their moving averages, in many cases at 2.5 or more standard deviations above their mean or are registering Overbought readings for the first time in 3 or 4 years……

it seems many are trying to squeeze the last 10% out of a ‘crowded’ trade and can’t seem to notice that the herd had already arrived.

Markets and prices factor in and discount future events and occurrences which is evident in the price of copper (as a result of the supply shortage & electrification theme) and semiconductor company share prices (see the SOX Index below)….

but once the ‘chip shortage’ story enters the popular vernacular, it’s time to be careful doing the wrong thing at the peak of the pendulum’s arc.

These prices are already been rising months and months before hand.

Incidentally, the SOX Index has already declined 14% over the past 6 weeks (from its April 1st high).

I implore that ‘many’ tune into the business of probability and mathematics.

Caveat emptor !

May 13, 2021
by Rob Zdravevski
rob@karriasset.com.au

Watching the U.S. 10 year bond yield

U.S. 10’s are still trading below an important downward sloping trendline as depicted in the chart below.

I made mention of this important occurrence in examples 1, 2 & 6 within my April 2021 newsletter, where I also stated the probability of a peak in the equities market around mid-May 2021.

https://mailchi.mp/karriasset/quadrupling-yields-increases-equities-risk-2

May 9, 2021

by Rob Zdravevski

rob@karriasset.com.au

One year on, it’s less fertile

In March 2020, the S&P 500’s forward P/E estimate momentarily dived (the red line in the chart below) to 14.

It was difficult to guess what future earnings would be, so I added an arbitrary 25% to the estimate, placing my forward P/E ratio estimate at 17.5.

This means the index had an earnings yield of 5.7%.

At that time, the 10 year government bond was yielding 0.8% which meant the earnings yield was 7 times more than the ‘risk-free’ rate.

That was its highest multiple since World War 2.

It led me to determine that equities were indeed a fertile habitat, as I wrote in a July 2020 newsletter.

https://mailchi.mp/karriasset/equities-the-fertile-habitat

Today, the S&P 500’s forward P/E is 22.

So comparing its earning yield of 4.5% to a 10 year bond yield of 1.59% placed this ‘spread’ on a comparatively measly 2.9 times.

If we remove the dominance of the FAANGM stocks (these 6 stocks account for 24% of the S&P 500’s market capitalisation), then the SPX forward estimate P/E drops to 19.5.

The earnings yield becomes 5.1%. The difference over the risk free rate remains an uninspiring 3.2 times.

This means it’s a less interesting environment for beta orientated index hugging investors and more alluring for the stock-picker.

May 9, 2021

by Rob Zdravevski

rob@karriasset.com.au

My various topics in 1 page

A summary (and links) to my writings over the past 6 weeks.

https://mailchi.mp/karriasset/current-topics-may-2021

Macro Extremes (week ending May 7, 2021)

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)

Coffee (2nd consecutive week)

Italian Government 10 Year Bond Yields (2nd consecutive week)

Zinc



Overbought (RSI > 70)

French & Korean Government 10 year bond yields

The Commodities Indices (the CRB and Bloomberg’s)

Aluminium (for 11 consecutive weeks)

Tin

Lean Hogs (for the 12th consecutive week and its highest price since July 2014)

Heating Oil

S&P 500 Index (for the 5th consecutive week)

Dow Jones Industrial Average (for the 5th consecutive week)

S&P Mid Cap 400 (9th consecutive week)

U.S. KBW Banking Index (10th consecutive week)

Nasdaq Transportation Index  (8th consecutive week)

Dow Jones Transport Index (9th consecutive week)

Sweden’s OMX 30 Equity Index (10th consecutive week)

France’s CAC-40 Equity Index (for the 4th consecutive week)



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

Copper (now in its 21st consecutive week of being Overbought, has also moved to a standard deviation extreme)

Iron Ore (in its 4th week being Overbought, it too has registered the Quinella)

Corn (overbought for the 22nd consecutive week & trading 84% above its 200 Week Moving Average)

Soybeans (overbought for 9 consecutive weeks & 73%> its 200 Week Moving Average)

Lumber (having risen 55% in past 6 weeks)

Wheat (2nd consecutive week)

Cryptocurrencies – EOS, Ethereum, Litecoin, Dogecoin & Ripple (XRP)

Assets (securities) within my immediate universe 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)

Cocoa

Oversold (RSI < 30)

Nil

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

USD/CAD (meaning sell your strong Canadian Dollars against the weaker U.S. Dollar)

The rising CAD is also coinciding with the rise in commodities prices.

Notes & Ideas:

After 11 consecutive weeks, the Canadian 10 year bond yields have pulled back from their extreme highs,

and so have the German, French and U.S. bond yields.

The ‘softs’ continue their parabolic rise. Such moves aren’t sustainable.

Fun Fact: The ASX 200 is the same price as 3 weeks ago when it touched a 2.5 standard deviation high.

And I’m watching for these which are nearly entering Overbought territory;

Spain’s IBEX 30, Gasoil, AUD/JPY & AUD/USD.

May 8, 2021

by Rob Zdravevski

rob@karriasset.com.au