Dear Reader,
After two months of turbulent performance in the stock market, the economic indicators have improved — so much so that the algorithm shows it’s good to have more equity exposure.
Since the last signal when we went either in cash or bonds (depending on your preference), the equity and bond markets have moved in all directions, resulting in the equity markets going up — except for the ASX. Our darling index is massively unchanged.
The Nasdaq has rallied quite a bit (more than 15%), and the broader-based S&P500 also did a cool 9%. The bonds, as expected, tanked between 4–5% as the interest rates were hiked in the US and here at home.
The question is why Dr Copper missed this initial US rally. The answer is easily found in the copper-gold ratio. As you can see in the below copper-gold ratio compared with the S&P500 graph, the ratio and the markets are well correlated…until they aren’t.
When we went defensive in April, the ratio kept deteriorating at a fast pace. However, the equity markets took another path. Since June, however, the ratio has been going up, and the correlation has been re-established.
| An explainer about the copper-gold ratio
By comparing longer-term averages of the prices of copper and gold, the copper-gold ratio can provide valuable insights into the overall health of the global economy. A rising copper-gold ratio (i.e., copper prices rising relative to gold prices) often indicates an expanding economy, as it suggests that industrial demand for copper is outpacing the demand for gold as a haven. Conversely, a falling copper-gold ratio (i.e., copper prices falling relative to gold prices) may signal an impending economic slowdown or recession, as it suggests that investors are becoming more risk-averse and seeking the safety of gold.
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The second indicator — the stress factor — has been muted for a while now. We can see an established trend or band markedly lower than the period between February and June 2022.
Now, the levels of the VVIX Index are establishing a band with levels that look similar to 2017–20. That period was a low volatility rising (more than 50%) market, interlaced with some shocks.
Sometimes it pays to zoom out. If the next 18 months are the same as 2018–20, who cares about the initial bump missed? And if you are following the ASX, we are just about to start!
So, yes. Chew’s Algo is turning bullish.
In summary, the increasing copper-gold ratio points to a bullish economic period. Central banks still face the challenge of controlling inflation, preventing a recession, and dealing with political pressures…but we seem to be nearing the end of this phase of high inflation and low growth with a tight labour market.
Finally, let’s look at our traffic lights, which have moved slightly since the last update.
The economic traffic light is green, as expressed by the calculated ratio of Copper and Gold, and the Industrial Activity Indicator indicates ‘Growing Economic Activity’. The computed ratio is 37% out of a possible 100.
Our Market Stress Indicator stays ‘Load the truck up’: 36% out of 100%: which is in the lower part of the stress graph.
I’ll sign off knowing we can rest calmly, knowing that our algo is monitoring the markets 24/7, and it will signal when we need to move: no need to have an opinion, no need to be stressed about daily fluctuations!
If the signal changes, you’ll be the first to know through SMS and email.
Cheers,
Peter Bakker,
Editor, First-Mover Algo Alert
Current positions:
Dr Copper has monitored the markets for you and found that the highest probability trade is now 0% bonds (or cash) and 100% equity exposure. Below are the four options you can use to create your orders, assuming you were 100% bonds (or 100% cash) and 0% equity.
If you trade the on the Australian exchanges:
Buy 100% VAS, so you have 100% VAS
Sell all bonds (IAF), so you have 0%.
If you trade the US exchanges:
Buy 100% QQQ, so you have 100% QQQ
Sell all bonds (TLT) so you have 0%.
If you trade the US exchanges and want to juice the returns (with increased risk):
Buy 100% TQQQ, so you have 100% TQQQ
Sell all bonds (TMF), so you have 0%.
If you trade on the Australian exchanges but want US exposure:
Buy 100% NDQ, so you have 100% NDQ
Sell all bonds (IAF), so you have 0%.
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All advice is general advice and has not taken into account your personal circumstances. Please seek independent financial advice regarding your own situation, or if in doubt about the suitability of an investment.
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