My take on the S&P 500

The S&P 500 is trudging higher and has registered a new Weekly Overbought reading.

This Overbought moment is also occurring with some coincidence of it also trading at its highest percentage above the 200 Week Moving Average (WMA).

This is long-term stuff.

These levels were last seen in 2007 and 2001.

It seems logical for the S&P 500 to mean revert over the coming 2 years but keep in mind the mean will continue to roll higher, perhaps to 3,500 in mid-2022.

So, if the S&P 500 ‘rolls over’ and meanders from current levels back to the 200 WMA, it’ll result in a 20% decline and only mean we are back to the same levels seen in November 2020 (for context, that’s 8 months ago)

This is why I think index based/ETF type (overly diversified) investing will provide poor results over the coming 2 years and the ‘age of the stock picker’ is already upon us.

Although (and perhaps confusingly), if you reference this link, the broader market also has every reason to carry on higher, much like the late 1990’s and perhaps more so when coupled with today’s liquidity and with a risk-free rate (the 10 year bond yield) which is now averaging ~ 1.8% as opposed to the 5.5% in the late 1990’s…..all, until the 10 year minus 2 year yield spread moves above 2%.

July 5, 2021

by Rob Zdravevski

rob@karriasset.com.au

Watching Interest Rates to Understand Equities

The latest chatter about the steepening of the yield curve between the yield of the US Government 10 year bond (minus) and the 2 year bond is no big deal.

That differential (“the spread”) is currently at 1.56%, 

(that’s how much the 10 year bond is yielding above the 2 year bond and it is represented in a plotted graph, we call the yield curve)

Yes, it’s the widest spread since September 2015, but it’s not extraordinary.

It has been twice that amount (3%) on several occasions over the past 30 years. (see chart below)

There is some exaggeration about how steep the curve is…it actually isn’t.

Don’t worry too much about that yield curve at the moment.

My story is about when the spread actually touched Zero (which is when the 10 year bond was offering the same yield as the 2 year bond) and not so much the actual spread nor the yield of the 10 year bond.

And then I have added comments to what happened to the equities market afterwards.

Example #1

In April 1998 the spread touched Zero,

but the S&P 500 continued to rise until the S&P 500 peaked in March 2000; some 21 months later.

A year earlier, in April 1997, the 10 Year Bond (“the 10’s) was yielding 7%. 

By April 1998 it had fallen to 5.6% (when the spread was Zero)…..

the yield would decline a little more, down to 4.4%.

By March 2000, it had climbed back to 6.66% to coincide with a peak in equities market.

Example #2

In January 2006, the spread was at Zero again, but stocks rallied for a further 17 months until the S&P 500 peaked in October 2007.

From that moment in January 2006, the 10’s rose from 4.3% to 5.3% on a couple occasions, reaching that same 5.3% peak in July 2007, just as economies were about to experience the ‘Global Financial Crisis’.

For a period of 6 weeks, the 5.3% yield did break above the downward sloping trend line (see the chart below) but the precedent of a Zero spread being registered 17 months earlier held sway.

Example #3

By December 2008, 10’s had fallen to 2% (although the spread didn’t flirt with Zero, it never went below 1.2%).

From this ebb, the yield doubled to 4% over the next 18 months (April 2010).

The stockmarket fell 20% over the next few months.

Example #4

Through stages of the GFC recovery, 10’s were back to 1.4% in July 2012.

Within the next 18 months (by December 2013), the 10’s doubled to 3%

The stockmarket rally was stifled and went sideways for 5 months.

Even though rates doubled, equities remained in a bull market because we never saw a Zero spread registered.

Equities resumed their rally as 10’s commenced a new decline in yields from 3% down to 1.7% over the next 14 months, being until January 2015.

Note: The United States Federal Reserve kept the Fed Funds Rate at Zero between 2008 and 2015.

Example #5 (the anomaly)

By July 2016, 10’s eased a little more to 1.35%. From there, they nearly doubled again (to 2.6%) within 5 months and then touched 3.2% by November 2018.

Although rates nearly trebled…..they never registered a Zero spread reading. Furthermore, the anomaly is that the 10’s yield broke above the sloping downtrend resistance line (see chart below), which gave the S&P 500 ‘carte blanche’ to rally….all until the 10’s yield crossed back beneath that (now and new) support line in the month of August 2019.

Example #6

In the next month, September 2019, saw another Zero spread registered. 

While absorbing an abrupt correction, the S&P 500 has soared and continually set new all-time highs, 18 months hence.

Today, the 10’s have Quadrupled from their 0.40% March 2020 low, to its current 1.72%.

Uncannily, we are 18 months further along since the spread touched Zero and we have seen an equity market participate in extraordinary gains…….

I will re-iterate…….the interest cost of government debt has Quadrupled within 12 months.

That matters to investors and to the government servicing the interest payments.

But we are at a moment, similar to the anomaly explained in Example #5.

Forget the ’spread’ and steepening yield curve, but let’s say the 10 year bond yield reaches 2% and decisively breaks above that sloping downward line, then it’s plausible that the S&P 500 rallies for a further 18 months.

This bullish scenario may represent the ‘last leg’ in the 11 year bull run which commenced at the March 2009 low.

Although, greater probability suggests (coinciding with fundamental valuations and various sentiment and anecdotal indicators) that the quantum of quadrupling interest rates will prove a greater weight on equities plight for further gains. 

This is the measured reason why I have shifted client equity portfolios to 35% cash position and hedged portfolios with put options. This was mentioned in my January 2021 newsletter.

March 21, 2021

by Rob Zdravevski

rob@karriasset.com

Market Quips & Synopsis – Sept 18, 2020

Market Quips & Synopsis Some brief points about selected markets or assets and look for the links within for added musings.

About current markets, I’ll open up by saying..

I notice there is dangerous trading going on, market capitalisations in some companies are extraordinary.
For example, how does $1 billion market cap on revenues of $20,000 sound?

ASX scuttlebutt says, “shorts” are trying to pressure companies into raising capital, some are seeing increased stock “promotion” activity and there are many people in the market “that don’t know what they’re doing or shouldn’t be there”.

I see the AUD and XAU (Gold) in a holding pattern, (see the AUD chart below);
they need to hold 0.7240 and $1,902 respectively,
breaks above 0.7355 & $1,978 should see a new lurch higher

Also watching AUDJPY closely, need to hold 76.00 to confirm “more risk-off”,
A move above 0.7730 suggests “risk-on” and higher equity indices

Another indictor to assess the steam in a S&P 500 decline is whether Japanese 10 Year Bonds (JGB”s) trade below 0.00%.

The S&P 500 is down 6% from recent highs,
Indicators are not clear in calling a new downward trend, however I think 3,272 is the target (a further 2.5% lower).

The Nasdaq 100 has now fallen 11% since its September 2nd high.
Looking for it to ease a further 2.4% to 10,814 before determining the strength of the decline.
The decline wasn’t a surprise, as written by me on August 29 and September 3rd  

Global portfolios have a 3% short position in either (or both) the Nasdaq 100 or the SOX index

My ASX 200 target is 5,803, which is 1.2% below the price as I write.

I’m pleased with calling Oil down from $44 to $39.30. Brent held $39.30 for the past week, 
has since rallied 10% in past 4 days….quick rallies are not always a preferred scenario

VIX remains relatively high at a reading of 26, the call option phenomenon has influenced this increase

The De-Equitisation story combined with rising money supply & low interest rates leads to my thesis that higher equities is the dominant and over-arching long term theme.

While we accept near-term rates will stay Lower for a while,
I think the long end of interest rate curve will rise.

AAII Survey exhibiting narrowest bull/bear spread since June 11, which is when S&P 500 had a 8.2% decline.
Since March 5th, more retail investors have remained bearish (than bullish). This survey remains a reasonable contrarian indicator as markets bottommed on March 26th and never looked back.

Oil Rig count showing no meaningful change of increase, see attached, number of rigs in operation has halved

I remain long term bullish on the Oil price and continue to accumulate positions (proxies) to benefit from this opinion.
Incidentally, I have a view there is a coming crisis in energy prices which will stoke inflation (albeit it may be 18 months away) 

In another edition, I’ll expand on various investing themes and I hope to soon publish my bullish thinking about Platinum on my Linkedin page.

That’s all for now…

warm regards,
Rob

Can’t Help It – It’s Looks Bullish

I’m not writing this to convince or prove a case to readers, but experience and instinct tells me equity markets are still going to higher.

That’s not such a bold prediction in light of the fact that the general price of listed equities have risen for over a century, but in the window of the past and next 5 years, my view is that we haven’t seen the  end of the advance which commenced in March 2009.

We are seeing lower capital inflows to equities, lower overall volume and low retail investor participation. Media commentators are screaming “crash” louder and cite many “problems” which includes trying to identify “bubbles”.

and yet many market indices are hitting new highs.

Just saying………

Below is a chart of the daily volume of shares traded on the New York Stock Exchange since the March 2009 S&P 500 low of 666 points until today, where the S&P 500 sits at 1,500 points.

A market that has advanced on declining volume. Just saying….

So what happens next?

If the market has risen handsomely in the face of so much worry (remember Greece, Portugal, Arab Spring, Chinese slowdowns, Japanese Debt, Iranian & North Korea nuclear threats, The Fiscal Cliff, Debt Ceiling’s etc etc.) on so little volume, then what happens if “normal” volume actually returns to this market.

Logic may not help you figure this out.

If notable, sustained volume returns to this market, it may not resemble selling pressure as you would logically assume. Logic may led you to believe that the market rose on declining volume thus it MUST fall when volume returns to normal or at least rises.

Imagine if increased volume was a new wave of buying volume? Those who sat on the sidelines citing every doomsday pundit for the past 4 years to justify their position, may suddenly have a Fear Of Missing Out (FOMO).

The FOMO effect could see markets rise swiftly leaving the “unadjusted” hanging when a change in trend does occur.

Markets are cruel, so my read is the equity markets see a small decline in the near term, only to get the bears excited followed by a surge in prices into June-August 2013, which should be fun to watch. Many investors are very good at buying high and selling low.

Bring back the volume – where are they High Frequency Traders, when you need them!

NYSE Volume Jan 2009- Jan 2013

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