#68 S2N: Crocodile Jaw

S2N Spotlight

Today I am not going to do a spotlight but rather make some general observations.

S2N Observations

The above chart shows the percentage exposure investment advisors and money managers have to the SP500, according to the National Association of Active Investment Managers. It has climbed back to nearly 100% and reflects the bullish sentiment prevailing.

In the next chart, I have packed a bunch of information onto it. The top pain shows the SP500 with its 50- day and 200-day moving averages. You can see the large gap (maybe one of the biggest) between the SP500 index and its 200-day moving average, which highlights how strong the market has been of late.

The middle pane with the blue line is the number of companies in the SP500 index that are above their own 50-day moving average. This index has just dropped below 50%. The bottom pane with the green index of SP500 companies that are above their 200-day moving average is still high but also has diverging non-confirmations like the 50-day index, i.e. the index is making lower highs. It appears that the broader market is slowly running out of steam. I see a reversal in the broad SP500 index as imminent.

I mentioned a few weeks ago that I was much more bullish on the Hang Seng vs the SP500. These 2 indexes have moved together for decades, but have diverged with a large crocodile jaw opening since the corona virus pandemic (see below). While I believe both countries are heading for tougher times I think China offers better relative value, and from what I am reading many fund managers are looking to follow this play.

I thought the next chart is pretty interesting, its important to note that I have plotted the NOMINAL GDP year on year rate of change over the US 10-year Treasury yield. Its pretty clear there is a relationship between these 2 time series. If NOMINAL GDP continues to drop one would think that bond yields would follow, which kind of goes against my thinking of higher bond yields to come, so this is a new chart I am going to keep a close eye on. I reiterate to myself that this is nominal GDP so it includes inflation and therefore it is quite possible to see the Nominal GDP curve to start rising again with inflation even though real GDP could head down. Stay tuned.

Speaking of relationships you can see a pretty close relationship with the US 10yr treasury yield and the US Dollar Index. Both indexes are slap bang on their 50 day moving averages. Where bond yields go really is the trillion dollar question. I still favour a rise above 5% in the very near future.

Finally I want to raise a further alert to the fact that this is the longest inversion of the yield curve on record. The 10Y-2Y Yield Curve has been inverted for 475 consecutive trading days, even surpassing the 1978-1980 inversion under Fed Chair Paul Volcker. Remember the inversion has a 100% track record for calling a recession. The recession usually begins when the yield curve reverts above zero. Remember what I said last week, I am a reversion to the mean guy, and some just call me mean.

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