Economy Health Check

I’m watching the Copper/Gold Ratio (HG/GC)

Its direction tells me about the health of the economy.

The direction of the HG/GC also helps confirm the direction of interest rates. More specifically, the U.S. government 10 year bond yield.

In the chart below, I’ve overlaid a price chart (in blue) of the S&P 500 against the HG/GC.

You can see that the general direction of both the SPX and the HG/GC follow each other.

At this moment, the HG/GC is nearing a point where it breaks either way.

We’ll need to wait and watch in the coming week or so.

In my earlier post today, I imply that interest rates may rise.

This, then suggests that the HG/GC breaks higher (meaning Copper rises and Gold declines) which translate into the S&P 500 rising further.

A ‘melt-up’ in the S&P 500 is not a perverse idea, especially against the grain of many who are calling the top, let alone a crash.

It may seem odd to think, but markets often move to where they can do the most damage…..

and going higher can damage those who have been on the sidelines or sold up recently.

Missing out can also hurt investors.

September 10, 2021

by Rob Zdravevski

rob@karriasset.com.au.

It’s only 10%

Context is required

If a 10% correction in the S&P 500 was to occur, we’re only back to March 2021 levels.

Hardly earth-shattering stuff.

In fact, a 12% retracement would see the S&P 500 kiss its 50 week moving average.

All quite healthy and plausible.

Currently, the S&P 500 is exhibiting a bearish outside reversal week.

As mentioned in my recent Macro Extremes note, it’s going to be an interesting week or two. The S&P 500 is also registering a weekly Overbought reading and my other indicators are also increasing probability for a move lower over the next 2 weeks or so.

My target for any decline is 4,022.

My medium term view is that equities move higher and any decline is merely a blip in the larger picture.

If ‘corrections’ concern you, it’s time to consider selling shares so to lower the amount of money exposed and at risk or consider taking out some insurance against ‘market risk’ such as buying put options or shorting the S&P 500 futures.

I bet many won’t do any of that.

August 18, 2021

by Rob Zdravevski

rob@karriasset.com.au

The Case for Higher Equities, a Stronger USD and Weaker Commodities


The US 10’s are yielding 1.33% and the Aussie 10’s are 1.20%.

That spread (difference) between the US 10 Government Bond Yield and the Australian 10 Year equivalent is currently 0.13%.

But the figure doesn’t really matter, it’s the direction of the trend which is of greater importance.

As we see today………a rising trend (and when coupled with a break above a trend line) portends greener pastures for equity prices.

Below you will find a ‘close-up’ of a Weekly chart, highlighting the current ‘break-out’, while the 40 year chart (on a Monthly basis) illustrates a rising trend (of the spread) equating to an advancing S&P 500 (SPX), while a decline trend results in a lower or sideways travel.

A rising trend in this interest rate differential tend to also equate to a stronger US Dollar, which in turn means a weaker AUD.

Which…..also correlates to weaker commodity prices.

This is an indicator worth watching for your macro and longer term positioning.

Who would think we’d see a stronger US Dollar?

Rising yields on U.S. Treasuries will prolong the advance in the Dollar.

And rising interest rates add to debt servicing stress which can lead to Sovereign Debt pressure (there is no use calling it a crisis, until it becomes one) at which point the U.S. Dollar remains the currency of ‘last resort’.

This can lead to more buying of the U.S. Dollar.

See how this scenario can develop?

August 11, 2021

by Rob Zdravevski

rob@karriasset.com.au

The Copper/Gold Ratio says markets move higher

The chart below shows the S&P 500 (SPX) overlaid with the Copper/Gold (HG/GC) Ratio on a daily basis over the past 15 years.

The latter ratio is a good indicator of the economy’s health and sometimes a predictor of interest rate direction.

I find this chart helpful when pondering my asset allocation to equities and how much broader risk I am comfortable taking, especially at the later end of an advance, bull market or rally.

I like seeing how the SPX reacts when the HG/GC breaks above or below its trend lines.

Today’s reading of 0.002396 is calculated by dividing the Copper price of $4.32 into Gold’s $1,803.

At this moment, while the HG/GC’s is trading above its trend line (and a reading of 0.00222) it is suggesting that the S&P 500 advance remains intact……..

This seems quite perverse to many, as pundits reiterate their calls of an overvalued, ‘bubble-esque’ equities market.

In some recent posts I challenge the norm and perhaps the consensus call for a notable decline.

The S&P 500 can continue trading at the historical higher end of its historical stretch above its 200 Week Moving Average, just like the late 1990’s.

https://www.linkedin.com/posts/robzdravevski_the-sp-500-is-trudging-higher-and-has-registered-activity-6817722567969927168-bcxo

and the way the S&P 500 relates to the U.S. 10 year bond yield or more pointedly, the spread between the 10 year and 2 year yield is another important indicator to watch.

https://www.linkedin.com/posts/robzdravevski_its-an-interesting-market-day-developing-activity-6818881106222444545-Wh-o

Investing is a highly nuanced past time or business.

Often markets move to where they can do the most damage….and going up can cause as much damage as going down, in circumstances such as ‘missing out’ or underperforming other fund managers if you’ve been holding a lot of cash.

P/E ratios are not the only thing to look at.

One scenario of a 0.00222 reading is Copper falling to $4.10 and Gold rising to $1,850. Just something to play around with.

July 12, 2021

by Rob Zdravevski

rob@karriasset.com.au

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

Gaps have been “backed and filled”

Equity Index targets mentioned in last week’s newsletter have been reached.

Gold still holding $1,902
Watching the currencies closely.

An obscure indicator for directional moves in equities is Bitcoin. Let’s see if it holds the $10,100 region.

https://mailchi.mp/karriasset/market-quips-september-18-2020

September 22, 2020
by Rob Zdravevski
rob@karriasset.com.au

An Even More Fertile Habitat

2 months ago, in the link below I wrote about equities being a fertile investing habitat.

I’d even say, there is no alternative (TINA), but that’s just a headline grab.

I mainly discussed the relative valuation and importantly the Earnings Yield of the S&P 500 versus the 10 year bond.

n.b. when P/E’s are 20, 30 and 40, absolutely cheap is difficult to find, although us stockpickers will continue to search.

https://robzdravevski.com/2020/07/15/equities-the-fertile-habitat/

Next year’s consensus P/E for the S&P 500 is 23 but on this occasion I wanted to extract the EPS estimates of the “inflated” FANNGM stocks.

These 6 stocks now make up 49% of the Nasdaq 100’s market cap and 26% of the S&P 500.

I found this work below which puts the S&P 500 P/E ex-FAANGM on 19.4.

This means the S&P 500’s Earnings Yield is 5.15% or 7.3 times more than the 10 year bond yield.

Re-iterating & re-phrasing comments from the linked story above…this multiple has NOT been seen since World War 2.

So, what’s the trade?

Perhaps…..Long selected portfolio stock ideas (or Russell 600 Small Cap) and Short Nasdaq 100 to hedge out the “overvalued” market risk?

I’ll get back to you.

source: https://www.yardeni.com/pub/faangms.pdfhttps://www.yardeni.com/pub/faangms.pdf

September 8, 2020
by Rob Zdravevski
rob@karriasset.com.au

Overbought S&P 500

The S&P 500 Index (at 3,478) and the Nasdaq 100 Index (at 11,972) are the most overbought since the Feb 18, 2020 highs….

it’s time to hedge out some market (index) risk.

August 27, 2020
by Rob Zdravevski
rob@karriasset.com.au

Bitcoin & SPX correlation

Doesn’t Bitcoin (the blue line) seem to have a leading correlation to the S&P 500 ?

 

 

%d bloggers like this: