Asset Prices Are About To Correct
by Tiho Brkan, The Short Side of Long
Just a quick technical update. It has come to my attention that variety of global macro asset classes have become overbought, over-extended and prone to a correction from both short term and medium term perspective. Market participants now believe that the Federal Reserve has all but given up on its rate hike intentions. Expectations from the bond pits show that FOMC will stay on hold until 2018. With that context unfolding over the last few weeks, and Brexit adding fuel to the fire, various bonds together with other interest rate sensitive assets have benefited. From a contrary point of view, despite the fact that my portfolio has benefited tremendously, I now hold an opinion that we are about to mean revert.
I’m going to keep the grid above, thanks to StockCharts.com website, in the same arrangement for both charts. Assets I am tracking here are Long Duration Treasuries ETF (NYSE: EDV), Treasuries Inflation Bonds ETF (NYSE: TIP), Investment Grade Bonds ETF (NYSE: LQD), Emerging Market Bonds (NYSE: EMB), US Commercial Real Estate (NYSE: VNQ) and Gold (NYSE: GLD). To be quite honest, I could have added a few more asset class subsections such as S&P Dividend Aristocrat Index, S&P Utilities Index and so forth. The first chart above is daily price (short term time frame). I am sure my readers will be able to make plethora of savvy observations, but I will just make simple three:
- Every single asset is at least 2 standard deviations above its 50 day bollinger band
- Every single asset has its relative strength index (RSI) above 70
- Every single asset has been gapping upwards and lately moving in vertical fashion
If we expend our time horizon with the second chart onto the weekly price (medium term time frame), we can see even more evidence of overextended trends, which are ripe for a correction. Firstly, several of these assets are up five, six or even seven weeks in the row. The prices are trading well above their respective 200 day moving averages. Weekly RSI readings are overbought (especially the Long Bond, Corporate Credit & EM Debt). Finally, once again we have large gaps on the weekly chart, accompanied by heavy volume (look at the ETF such as TLT and EDV). I would advise my readers to be very cautious when it comes to adding new capital towards the overall bond market, real estate and precious metals sectors. This warning would also extend to defensive sectors such as Utilities, Staples, Dividend and Minimum Volatility equity indices… all of which are overextended.
In the previous newsletter, I discussed recent developments concerning the S&P 500 index:
“On the topic of US resilience, what has me worried is an ugly technical reversal candle that occurred right at the resistance [S&P 500]. A decent short term support, as well as the 200 day moving average, are found around 2020 on this closely watched index. A breach of these levels, could signal further downside. Short term traders should pay close attention to S&P 500’s critical support level around 2020, and if breached could signal the continuation of the “risk off” trade. On the other hand, another sign of resilience by US equities right here will surely signal that new all time highs lay ahead.”
We got yet another sign of resilience. The US index refuses to go down and Brexit selling was quickly reversed. US equities are having yet another go at the 2,100 to 2,120 resistance in the attempt to make new all time highs (total return index has already achieved this). I’ll be watching price and breadth participation very closely.
Finally, I leave for Russia tomorrow. I shall be visiting Moscow and St Petersburg for several weeks, before I travel to the almighty European Union empire haha. I would love to meet any readers from either of these cities, so please email me back if you have free time.
Warmest of regards,
Tiho
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