Extreme markets, maybe?

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I have created a new screener to look for extremes in the spread of an asset with its 200-day simple moving average. The results are pretty interesting, starting with:

US Dollar, the threshold for the trigger is when the spread reaches -6. That means the price of the dollar index is 6 points below the 200-day moving average. This has happened 905 times in more than 60 years, and the average over the different time frames up to a year after the trigger is always negative.

While I was looking at the dollar, I thought I would take a look at the S&P 500. As you can see, in 60 years a spread above 400 has not happened very often. In fact, it happened for the first time in 2020. The value of this analysis is actually very limited; I realise this as I write this—the reason is we are not measuring apples with apples because the index price is so much higher now than it was 30 or 40 years ago.

I have left the above analysis in place, as I think there is an important lesson we can learn here. It is much better to look at the percentage spread instead of the spread in points.

What you see now is that the S&P 500 is, in fact, very far from a momentum extreme.

While we are checking the relevance of our analysis, we can relook at the US Dollar on a percentage basis.

Finally, while we are at it, the biggest beneficiary of a weak dollar is usually gold. When we look at the chart below, it provides us with a slightly contradictory picture. It seems that gold has put in a recent high and should also weaken further.

Why not look at the last piece in the puzzle for an extra clue? I will leave interpretations to you guys.

S2N observations

“We must stick with a decision.” “That applies only to a sound decision, not to any decision. When it is day if you imagine it is night, would you believe then that it must be true, and you should not change your mind?”

Epictetus, Discourses, 2.14

If you are playing in the macro space, things often take a long time to play out as you see them. Some people just say what people want them to say and change their tune with the smallest amount of resistance. While others with wisdom and courage will stand their ground. According to the Stoics, this is symbolic of virtue.

I stand by my call that the US stock market is trading way above fair value and that, despite the fact that there is more to go in today’s analysis by way of a momentum extreme (according to this analysis), the right path is to be hedging for sharp moves to the downside and looking away from the tempting trap of endless new highs.

S2N screener alert

Silver continued to move strongly upwards with a +4 daily Z-score.

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