Comment of the Day
31st Jult 2023
Eoin Treacy
Aug 1
Video commentary for July 31st 2023
A link to today's video commentary is posted in the Subscriber's Area.
Air Pockets, Free Falls, and More Cowbell
Thanks to a subscriber for this report from John Hussman may be of interest. Here is a section:
There are very few conditions in which we have any specific expectations for near-term market action. The exceptions are when the market is strenuously overextended in a “trap door” situation combining rich valuations with unfavorable internals, or when the market is strenuously compressed following a material improvement in valuations.
Over the past four decades, I’ve developed scores of interesting “syndromes” and relationships, many that I’ve discussed in these market comments. A subset of these capture features of “overextension” and “compression” that occur at major market extremes.
The chart below shows one such syndrome that emerged in mid-April as the S&P 500 advanced above 4400, and again last week, which I consider part of the same overextended advance. The criteria are intended to capture a certain “relentlessness” of speculation that often precedes abrupt market losses. This particular syndrome is among several that I monitor to identify speculative “blowoffs.”
In this case, “relentlessness” is defined by periods when the S&P 500 is at least 4.5% above its 50-day average, with a relative strength index (RSI) above 70 – indicating a preponderance of advancing days relative to declining days in recent weeks, a 14-day rate of change (ROC) greater than 4% in the S&P 500, and at least a mildly bullish tilt in advisory sentiment, based on Investors Intelligence data. Periods like this look briefly parabolic, as investors increasingly buy every dip, in fear of missing out.
Eoin Treacy's view
The Nasdaq-100 is back testing its all-time peak and the dominance of the FANGMANT shares is now both more concentrated and dominant relative to the wider market than at the peak in late 2021. That alone is grounds for caution but it is not a timing indicator, the overbought conditions can progress even further. It is, however, a very good time to have one’s stop strategy in place.
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BOJ Wades Into Bond Market After YCC Tweak Triggers Yield Spike
This article from Bloomberg may be of interest. Here is a section:
The purchases are another reminder that Japan’s slow retreat from ultra-loose monetary policy brings a heightened risk of volatility and intervention across multiple asset classes globally. It also underscores the challenge in interpreting a rates regime that is built on gray lines to let the BOJ be flexible rather than clarity for markets.
“That flexibility is obtained with opaqueness on when they intervene,” said Calvin Yeoh, portfolio manager at hedge fund Blue Edge Advisors Pte in Singapore. “Flexibility is another word for optionality, which potentially manifests as volatility. No one knows exactly when, between 0.5 to 1%, does the BOJ step in meaningfully, which is an awfully wide range.”
Eoin Treacy's view
Japan has been engaged in a version of modern monetary theory for decades. They have been issuing oodles of debt with no real plan to pay it back because deflation prevailed and there was no urgency. While inflation is the stated desired outcome, it does not come without risk.
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Euro Zone Returns to Growth as Core Inflation Stays Strong
This article from Bloomberg may be of interest. Here is a section:
Second-quarter gross domestic product advanced by 0.3% from the previous three months after shrinking and stagnating in the two earlier periods, according to Eurostat data published Monday. A Bloomberg survey of economists saw an increase of 0.2%.
A separate release showed consumer prices rose 5.3% from a year ago in July, as expected. But in a sign of lingering dangers, the closely watched underlying inflation measure that excludes volatile costs like food and energy overshot estimates by a touch to stay at 5.5%, surpassing the headline gauge for the first time since 2021.
German bonds stayed lower after the data, leaving the yield on two-year debt — among the most sensitive to changes in monetary policy — two basis points higher at 3.07%. Money markets maintained odds of about 70% on a further quarter-point rate increase by year-end.
While the euro zone’s GDP number looks encouraging, it was buoyed by a bumper three months from Ireland, which expanded by 3.3%. The country comprised less than 4% of the bloc’s overall output last year, and contributed about 0.1 percentage point to second-quarter growth.
Eoin Treacy's view
Ireland is a small economy so when its performance is enough to move the entire economic outlook for the Eurozone its more about the strength of the mega-caps headquartered there than a broad-based rebound. The big jump in Boeing orders last months, which skewed capital goods orders for the USA, was probably a better indicator of Eurozone resilience.
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Eoin's personal portfolio: July 20th stock index short initiated
One of the questions subscribers ask most often is how to find details of my open trades. To make it easier I will simply repost the latest summary on a daily basis until there is a change.
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© 2023 Eoin Treacy
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