With what’s happening in Europe, it’s a scary time for many. I hardly ever follow the news, but I have been staying current on the war and this short video is a good explainer. I hope the world can find peace very soon.
That said, the market analysis on this blog is strictly price-based and free of politics. It’s a trading journal that organizes all the week’s key price data, forms trade ideas, and tracks the progression of those trades.
I’ll cover a lot in today’s post. Let’s begin with a look at the year so far and a trade highlight.
In this market, it has paid to do 2 things:
Favor defensive assets (GLD, GDX, USD) over risk-on assets (SPY, ARKK, BTC, URA, etc.). However, commodities (wheat, gas, palladium, and oil) have been the year’s biggest gainers.
Sit tight and wait until the end of the week before making any portfolio changes. We saw various risk assets & measures spike higher earlier this week before reversing sharply and trapping new longs (eg. TNX, COPX:GDX, URA, BTC). We saw similar big reversals in prior weeks. This market is trying extra hard to confuse everyone. It’s why I draw simple horizontal lines on charts with longer timeframes.
With defensive positioning and patience, I’ve been able to generate a positive return YTD:
In Nov-Dec, LAND was my biggest winner. This year, GDX and PALL have been my biggest winners.
Palladium was up 26% this week and 56% YTD, making it one of the strongest assets this year (even beating WTI and energy stocks). It’s now topping the ETF leadership board:
I first tweeted about palladium back in early Dec and noted that commercial hedgers were record bullish. However, at the time palladium was still in a strong downtrend. I waited for it to bottom, base, and then breakout before going long at roughly $2,000. This is to manage risk.
Of course, I had no idea what narrative would drive this metal higher, just that the technicals and commercial positioning were in my favor. Now, NPR’s Planet Money featured palladium in this recent podcast. It turns out Russia accounts for 43% of the global palladium production.
With palladium now up 100% from its Dec lows and pressed up against the former ATH from last year, we could see it base before resuming higher (smart $ continues to be very bullish while the trend is strong). I trimmed my holding and added to my GDX position. My largest positions currently are GLD, GDX, and TLT.
Let’s now look at some important charts from this week.
TNX Weekly. This is a key chart to watch right now. The US 10yr treasury yield is weak and flirting with a major support level. This measure is highly tied to the COPX:GDX ratio, which we saw break down a couple weeks ago.
It’s interesting to note that we’re seeing weakness in yields right after all the "Fed tightening" noise that’s been dominating my twitter feed in the past couple weeks. Meanwhile, commercial hedgers have been very long bonds.
JPM Weekly. 1yr breakdown. Banks are getting hit as TNX struggles to hold support.
WTIC Monthly. One area I got wrong in the past month: I underestimated how far oil and industrial materials would run. My thinking was that oil would at least pause while stocks are in correction mode. I’m still wary of oil here as it’s facing major resistance after a strong run – like palladium. Longer-term, I’m bullish on industrial commodities and stocks (more on this at the end of this post).
Aside: With WTI rising above $110, Interactive Brokers increased their margin requirements on oil futures. I won't forget this story from 2yrs ago: A 30yr old trader with an IB account <$100K bought oil futures before WTI went negative. The next day, he got a margin call for 9 million dollars!
KRBN Weekly. 2 weeks ago, I shared this chart when KRBN made a failed breakout. It’s now seeing a waterfall decline. There’s validity to the saying “from failed moves come fast moves in the opposite direction.”
ETFs that have been in the strongest downtrends (MJ, ARKK, KWEB) fell another 8-13% this week.
Bonds, US dollar and gold are all showing strength. That’s telling us something about the type of market we’re in.
UUP Monthly. This ETF tracking the US Dollar Index opened the month above a major 14yr level.
Gold Weekly. We got a breakout above the level I’ve been sharing in the past 2 blog posts.
Gold miners also blasted off the support levels I posted last week for Newmont and Barrick. In a new uptrend, this is what we want to see: steadily rising prices with little give-back. This was absent in prior rally attempts for gold miners over the past year.
A note on Sentiment
There have been a lot of people posting sentiment charts on twitter. Various measures (AAII, II, NAAIM) have been showing extreme pessimism towards stocks for weeks now. Yet the S&P 500 has kept dropping. This is another lesson that only price pays.
While I can believe that extreme retail sentiment can eventually mark tops/bottoms (see above AAII chart), I am less convinced that NAAIM can do that.
NAAIM are professionals actively trading with real client money - they have skin in the game and only the ones with a good edge survive. Most of them are trend followers. Does it make sense betting against them? No.
It turns out that if you copied their SPX exposure (and held bonds for the rest), you achieved a higher Sharpe Ratio than a 60/40 portfolio over past 16yrs (ever since the data became available). And if you bet against them, you achieved a lower Sharpe Ratio. I crunched the numbers:
I remain defensive in my portfolio. The market had been showing bearish divergences for a while (eg. HYG:TLT, EEM, and Nasdaq Breadth peaked a year ago). And now in recent months, price charts began breaking down.
While in the short-term I want to remain defensive, I’ll note that many longer-term monthly charts are still very bullish. Global stocks, value sectors, and commodities (eg. Canada, banks, steel, oil, etc) have only recently come out of multi-decade bases. The S&P 500 and many of its sectors are still in strong, long-term uptrends.
Sentiment, valuations, and macro conditions also support that the bull market in stocks might not be over yet. This data is NOT meant for trading, but it could offer some context of where we might be in the cycle:
Retail sentiment at extreme pessimism (as measured by AAII net bulls).
Valuations are healthy: The forward earnings yield for US small-caps and global ex-USA is over 7% while 10yr US Treasuries are yielding less than 2%.
Macro is still favorable: The yield curve hasn’t inverted and even after it does, stocks typically don’t peak until months to a year later. The Fed hasn’t begun tightening either and the recent weakness in bond yields likely puts them in no rush to do so.
Again, this is just for context. I will wait for price to confirm before I turnover the portfolio from a defensive posture to a more offensive one.
This was a long post and I’ll end it here. If you made it this far, please give this post a like and share. Thanks for reading.
Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do your own due diligence.