General Markets Talk

Remove this Banner Ad

Log in to remove this ad.

BTFD again, I suppose.

The start of my month was pretty awful (things have improved since) - so awful that I decided to rethink my strategy a tad.

I had originally intended to place just 3% into the materials/energy sector, but unfortunately the upshot was that I found that I didn't really benefit at all should those sectors have done well. Also, I realised that placing anything more than 12% into any one sector was really concentrating risk unnecessarily. I decided to up my minimum allocation in any one sector to above 4%. I haven't yet acted on materials - IMO as a whole they're going to pop before energy does because rising inflation is much more likely to benefit energy than materials historically, with the possible exception of wheat and iron ore (see below) - but although I detest them as a company, I decided to place AUD$500 in XOM (Exxon Mobil):

1) Zacks recommended them
2) It does get me above the 4% threshold for energy
3) While I think it's unlikely that Russia outright overthrows the Ukrainian regime, there is a decent chance that they secure Donbass/Lugansk if provoked heavily enough, and since Russia is a major oil/gas supplier, they may cut off supply to Ukraine and perhaps their Western allies in retaliation should a war break out - that would cause the price of oil/gas, along with iron ore and wheat (or which Ukraine and Russia are big exporters), to rise
4) XOM, being one of the largest energy companies, has an entrenched competitive advantage + enough reach to exploit such a price rise, and is relatively well-equipped to weather downturns and disinflation because of its dividend aristocrat status
5) Energy is a value sector, and given that inflation and yields are expected to rise in the US over the short-term due to Fed rate hikes, US value > US growth during H1 2022 at least
6) It's unaffected by a rise or fall in the USD (although I'm bullish RE the USD during 2022 because it is a safe-haven currency and those fare relatively well in declining stock markets)

Also, showing my usual lack of nuance, I failed to recognise that while healthcare is indeed a defensive sector, there's a fine line between growth and blue-chip healthcare. I knew that the former would be more volatile, but I didn't recognise how much more - and some companies (like Pfizer) straddle both.

For that reason, I was increasingly unsure whether HZNP was really the right company to weather this storm - it was on the WVOL (min vol) index, but only barely - plus it was also a growth stock, and not quite a large-cap stock, and large-cap stocks fare best during market crashes. I decided to cut my losses and sell it.

I still think that inflation in the US is short-term, because you have a withdrawal of US stimulus + Fed interest rate hikes + inventory pileups. That should ultimately push inflation down, not least because interest rates and inflation are inversely correlated and you'd ultimately have a situation where too little money is chasing too many goods (disinflation/deflation).

However, I didn't account for supply chain disruptions + OMICRON causing demand for medical supplies to remain high despite likely shortages. That leads to a situation where you do indeed have too much money chasing too few goods, thus causing inflation. I do think that stimulus being withdrawn will reduce the amount of money available to chase such goods and thus inflation over the medium term, not to mention that such disruptions will ultimately resolve themselves (likely during H2 2022).

That said, over H1 2022, since the US economic situation is deteriorating while inflation is increasing, IMO you get stagflation because there's still too much money in the economy. A Russo-Ukraine war would aggravate and prolong that situation, since the US imports Russian oil and demand for oil/gas is inelastic. Europe would also suffer stagflation as a result, but their currencies (CHF aside) would fare worse than the USD since they are not safe-haven currencies.

During stagflationary periods, historically (value moreso than growth) healthcare/consumer staples/energy benefit, while consumer discretionary and materials perform quite poorly. Consumer discretionary is obvious - consumers have less discretionary income to spend - but I've come to think that while materials as a whole would underperform due to demand shifting to certain oil/gas (energy) over other commodities since they're the most inelastic worldwide (i.e. oil/gas demand is consistently high worldwide). The same is not necessarily true for other commodities.

However, I've realised that my thinking was too unnuanced and now I recognise that specific commodities might indeed clean up during stagflation anyway, depending on the specific economic conditions. While China's economic difficulties make me disinclined to invest in iron ore companies - particularly Australian iron ore companies - wheat companies may be worth looking into, since wheat demand is fairly inelastic worldwide and so difficulties in Russia/Ukraine might ultimately increase prices.

RE Australia, the same supply chain difficulties plus the economy imploding have created the same stagflationary situation. I think this will force the RBA to raise interest rates within 6 months - maybe before H1 2022 ends. Along with an expected improvement in consumer spending leading to an eventual consumption boom after OMICRON/COVID has been suppressed, this would raise the AUD, as would China stimulating, as expected during H2 2022, thus increasing demand for AUS commodities - but not after they decline first due to USD and commodities being inversely correlated, and the Fed's attempts to raise the USD.

However, Fed interest rate hikes would increase the USD relative to other currencies and the USD has always performed relatively well during stock market crashes due to its safe-haven status, while China 'loosening' would also cause the yuan to decline (yuan has always been strongly correlated with rising AUD/USD), limiting both the extent and length of the AUD's improvement relative to the USD over 2022.

The Fed's attempts to raise the USD via hiking interest rates should cause disinflation in the US eventually (H2 2022), reducing oil/energy/commodity prices. A recession is also expected in the US during H2 2022. Recessions and stock market corrections are strongly correlated, which should drive investors into USD and US bonds due to the associated disinflation, increasing US bond prices and decreasing yields. US and DM stock market corrections are also strongly correlated, so I expect the ASX, along with European markets, to correct as well. This would reduce EURO/GBP relative to USD because neither are safe-haven currencies. I'm less certain about EURO/GBP bonds because of complications RE Russia/Ukraine maybe causing stagflation for longer, rendering investment in bonds - except inflation-linked ones - rather pointless.

My own revised strategy has been to do the following (BTFD = buy the ******* dip):
  • Due to issues RE brokerage, make sure I invest a minimum of AUD/USD $250 in stocks, $500 for currency and $750 for bonds (currency ETF's are up to half as volatile as stocks and bond ETF's are up to 3 times less volatile, so you'd need to spend more to make a capital gain after brokerage has been deducted)
  • To take full advantage of market dips in the future, make sure to invest up to AUD/USD $750 in stocks. Currency/bonds are less volatile, and I wouldn't want to blow too much money on them at any one time, so I've kept their maximum investment amounts to $1000/$1250
  • Raise USDU and UUP while retaining USD, keeping exposure to currency at around 10% of my portfolio (my current maximum).
  • Leave US bond allocations for now - TIPS excepted - because of expected Fed rate hikes raising yields, but increase after H1 2022 and sell TIPS in process if necessary because they're useless during disinflation/deflation
  • Leave EURO bond allocations alone for now because of possible stagflation due to Russo-Ukraine conflict potentially provoking the ECB/Bank of England into raising interest rates sooner than expected - make exception for inflation-linked bonds (WIP)
  • I did purchase $750 in VAF because it was bearish, plus the market appeared to prematurely price in RBA rate hikes, but I think those rate hikes might actually occur now so I'll leave AUS bond allocations alone for now - maybe except ILB
  • Keep asset allocation investment at around 5%, by BTFD in VDGR and AOK
  • Retain TLS despite rate hikes hurting its price because it is Australia's least volatile stock
  • BTFD RE WES because it's a consumer discretionary stock + a high-quality stock + a min vol stock which has both discretionary/staple traits + it might acquire Priceline, strengthening its healthcare investments - not a bad thing during COVID
  • BTFD with QUAL/QLTY/QMIX because they're quality ETF's, and investors tend to cling to those during downturns
  • BTFD with min vol and dividend ETF's (again more attractive during downturns)
  • Don't BTFD with HLTH or ETHI - just let them decline because rate hikes will cut into their price anyway (they're too growthy)
  • Sell HZNP, but retain VRTX/PFE/HSY/NEE (combination of min vol + quality + large-cap)
  • Don't BTFD with AUS ETF's just yet - their heavy materials component + a stillborn economy means they still have further to fall
  • Look to increase investment in WES later in H1 2022 to prepare for improvement in consumer spending
  • BTFD in UMAX/YMAX, because those are covered call ETF's and their yield allows them to outperform in declining/volatile markets
  • Don't BTFD with high-yield bonds (USHY) or REIT's due to declining stock market, with caveats listed below
  • Don't BTFD with EM's due to rising USD, with caveats listed below
  • Don't BTFD with infrastructure, utilities or telco (TLS) over short-term due to expected US/AUS interest rate hikes
  • Nonetheless, retain minimum of 2.5% and maximum of 35% in each investment class to optimise diversification without concentrating too much in any given investment
  • Look to sell off VBND and VAF where possible due to expected rate hikes + being hedged to AUD negatively impacting their prices
  • Retain EWL due to relatively defensive nature + CHF/USD both being safe-haven currencies should somewhat offset USD rise during stock market correction

Factors I now use to set stop losses - can be found via CMC Markets (my previous ones were too crude):

Set maps back to March 2020 (3 years on CMC) to give you a proper frame of reference!

Upper Indicators:
  • Linear Regression Trend 50%: Shows when you're entering into a bullish or bearish market
  • Standard Deviation Channel - SDC (the channel has to be set at the midway point between LRT 50% and LRT 100% via adjusting the channel width to anywhere between 0.5 and 2, otherwise the measurement is meaningless - would usually be higher for stocks and lower for ETFs, particularly bond ETFs): If your price is below/above this, then you ARE in a bearish/bullish market, and should consider buying/selling.
  • Linear Regression Trend 100%: If your price goes above/below this, then you're in a genuine bear/bull market and you should purchase or sell, but expect further losses because this is done as part of a stop loss strategy - you're protecting yourself from losses you would have incurred had you invested earlier
  • Standard of error measurement: Used to signify when a market is fairly neutral/stagnant. Anything above this points to potential bullish/bearish behaviour down the road. If you're in a bear market, then consider selling. If you're in a bull market, just wait. Covered call ETF's should do quite well in these circumstances.
Since these factors focus superficially on price, they can only be used in conjunction with lower indicators, which I have found far more useful because, rather than focusing on superficial price, they go 'lower' into the stock and focus on underlying bullish/bearish trends.
  • CCI (both red and black lines should be above -100 before buying and +100 before selling)
  • Chande Momentum (should be -50 before buying and +50 before selling => up to -80/+80 in a real bull/bear market)
  • DMI (the higher the green line, the more likely it is that you should sell or buy, because it signifies greater volatility and thus a change in price momentum - if the green line is higher than either a high black/red line in the case of stocks, you should consider selling/buying - with certain ETFs and stocks (especially bond ETFs) the green line will be much lower, and would surpass the bottom line rather than the top line)
  • MACD (again shows extent of decline or rise, informing decision to buy or sell - you'll know when the rise/decline is peaking because you'll start seeing lengthening red/green lines, or vice versa)
  • Stochastic RSI (RSI is more stable and thus more valuable in volatile markets; Stochastic is more valuable in stable markets - given market is volatile, RSI should be below 30%/above 70% before a bearish/bullish market arises => 20-25%/75-80% for a genuine bear/bull market, with the teens denoting the bottom)
  • True Strength Index (+20 denotes a bullish market, -20 denotes a bearish market; +30 or -30 denotes a genuine bear/bull market, but not necessarily the bottom)
    • I've found that different sectors bottom out at different TSIs during recessions - from -25 to -35 for telcos/staples/healthcare/utilities, from -50 to -70 for volatile sectors like energy.
    • TSIs can get lower than that for defensive sectors but those are caused by unusual events (stagflation + interest rate hikes + commodity-charged AUD reducing the value of consumer staples during late cycle, which is unusual; NextEra Energy fell to -45 because of a change of management, which I didn't take advantage of given the uncertainty RE Fed hikes)
    • If a company has a competitive advantage that ensures that they'll weather the storm better than their lesser competitors due to their reputation, then 1) they'll bottom out on the low end and 2) during future non-recessionary slumps, they'll bottom out between -20 and -40.
    • A company's bottom may be far lower than its top - I suspect this is because in the case of energy companies, their general performance across the four business cycles is mediocre, with them only really shining during the late cycle, but they still suffer during recessionary cycles because those are quite often brought on by unsustainable oil prices sapping customers of money they need to buy discretionary goods (2022 is quite like 2008 in this regard)
  • Chaikin's Volatility (Where you see a spike well above the norm, it points to future increasing volatility, and that you should sell if the TSI is above 20, because an increasingly volatile market leads to the stock market crashing under its own weight as companies are being bid to the moon while prescient sellers are trying to stem the flow by cashing out - eventually sellers outnumber the buyers and a slump or crash occurs)
RE currency and bonds, I need to recalculate them.

In a more stable market, I would just use the Trend Trigger Factor. There'd be no need to divide/multiply the TTF because it is a much more volatile measurement than the TSI. RE the TTF, the sell/buy threshold is +100/-100. I reckon that would line up pretty well with my other measurements.

I normally go back 1 full year (or 2 should 1 be unavailable), but I've gone back to the 2020 crash because I wanted to figure out where to place my stop loss using the above formulae.

Overall, I have about 52.5% invested in stocks and 47.5% invested in non-stocks. I think this is overkill for a young investor like myself in retrospect (maybe should have been 70/30 or 65/35), and I have neglected inflation-linked bonds too much due to ignorance/complacency, but it is what it is.

Thanks for reading. :)

EDIT: Kanga Commando The Cryptkeeper jd2010 - I've added more commentary regarding my selected market timing indicators that you might find to be interesting.

EDIT (4/3/2022): I updated this post to help users negotiate a real bull or bear market.

EDIT (10/3/2022): I updated this post because I realised that my prior explanations were too simplistic. The Cryptkeeper Kanga Commando jd2010 - Sorry to bother you guys, just felt that it was courteous to keep you abreast of my findings.
 
Last edited:

Analysts warn on lithium valuations​

Michael BennetWA Reporter
Jan 26, 2022 – 4.12pm


Analysts are calling time on lithium companies’ soaring stock prices, warning that despite demand outstripping supply for the forseeable future as consumers switch to electric vehicles, valuations are looking full.
Buoyed by the goldilocks combination of a sharp rebound in demand and the industry’s inability to quickly crank up supply, lithium prices soared in 2021 – carbonate jumping 431 per cent, hydroxide 340 per cent and spodumene 532 per cent.
edf90878b8edd5cc11e3c6fbd1ab9cd981c52413

Mineral Resources’ lithium processing plant at Wodgina in Western Australia.
The conditions sparked a strong rally in share prices, Chris Ellison’s Mineral Resources rising more than 50 per cent in the three months leading up to its quarterly report on Tuesday.
Citi analyst Paul McTaggart said despite the mining and mining services company’s “solid” production numbers and likelihood of even higher lithium prices ahead, the stock had “run to fair value levels” and sliced his rating to “neutral”.
Broker Canaccord this week cut lithium plays Pilbara Minerals and Ioneer to “hold”, arguing they too were trading towards “fair valuation”.

Related Quotes​

MINMineral Resources​

$57.120 -7.45%
1 year1 day
Sorry, there has been an error loading this content. Please try again later.

Updated: Jan 27, 2022 – 7.25am. Data is 20 mins delayed.
View MIN related articles

PLSPilbara Minerals​

$3.250 -6.34%
Sorry, there has been an error loading this content. Please try again later.


“Even with our raised spodumene prices, valuation multiples are no longer cheap,” Mr McTaggart said. “For now, we think the shares need to consolidate and for the market to gain visibility on Wodgina trains two and three restarts.”
With Mineral Resources and Albemarle expecting their Wodgina project in the Pilbara to be producing spodumene concentrate from one of its three processing trains early next year, the company said the decision to restart the other two would be made “subject to market demand”.

Minimising COVID-19 risks​

The miner’s other joint venture with Albemarle, the Kemerton lithium hydroxide plant in Western Australia, also attracted attention after positive COVID-19 cases at the project, which resulted in close contacts having to isolate.
It comes as the WA mining industry awaits details from the state government on operating protocols amid higher case numbers following Premier Mark McGowan’s scrapping of his February 5 border reopening plans.
Mineral Resources said it would “continue to do everything possible” to minimise COVID-19 risks and update its management plan in line with government and health regulations.

Despite COVID-19’s entrance into WA, Canaccord analyst Reg Spencer said more lithium supply was set to hit the market, claiming that at the current record prices miners were “more than three times incentive pricing” and more projects were getting financed.
Liontown Resources in December raised $450 million for its Kathleen Valley project, but recently claimed the market may be overestimating the coming supply.
Street Talk

Related​

Centaurus Metals shows battery metals still hot in 2022​

Mr Spencer said the lithium market would remain tight, predicting electric vehicle sales to grow 26 per cent to 9.5 million units in 2022 and at a compound annual growth rate of 20 per cent out to 2030 – equating to a penetration rate of 46 per cent. This would result in demand exceeding supply after 2025.
“2022 is shaping up to be a stand-out year in the lithium market, hard-pressed given 2021,” Mr Spencer said, adding prices would be “higher for longer”.

“Equities can keep going higher, but we are starting to look for opportunities.”
Mineral Resources reiterated full-year guidance from its Mount Marion project of 450-475 kilo tonnes, and said its average realised spodumene price in the December quarter was $US1153 a tonne, up 56 per cent on the previous three months.
Its shares fell 7.5 per cent to $57.12 on Tuesday amid a nasty broader sell-off in the market that also hit other lithium miners.
Click to expand...
 
Taylor said:
Lithium pricing itself out of the market is a genuine possibility, green activism needs to be accessible so unless there is a ceiling put on prices or government subsidies to keep the battery prices from raising 500% that push for 100% non ICE will hit a big bottleneck.
Click to expand...

It's still an open market on lithium though. Prices aren't fixed, they are subject to supply and demand.
 
The Cryptkeeper said:
It's still an open market on lithium though. Prices aren't fixed, they are subject to supply and demand.
Click to expand...

The demand is already forecast based off government mandated targets on vehicles. They will need to subsidise the cost quite a bit to meet the target or drop the target which will drop the demand.
 
Taylor said:
The demand is already forecast based off government mandated targets on vehicles. They will need to subsidise the cost quite a bit to meet the target or drop the target which will drop the demand.
Click to expand...

No, what I am saying is the lithium price in indexed directly to demand.

The forecast is the forecast but the current price of lithium is based on current requirements. The price of lithium carbonate went up 25% last year. That was entirely due to current demand.

As for government mandated targets on vehicles, I don't think there is cause for concern. It would be political suicide for any western government to walk back EV targets. And demand for EV's is not going to subside in bigger markets like China either. They are all in on it.

I do expect the lithium price to even out as more players get involved but the future demand is there.
 

(Log in to remove this ad.)

The Cryptkeeper said:
No, what I am saying is the lithium price in indexed directly to demand.

The forecast is the forecast but the current price of lithium is based on current requirements. The price of lithium carbonate went up 25% last year. That was entirely due to current demand.

As for government mandated targets on vehicles, I don't think there is cause for concern. It would be political suicide for any western government to walk back EV targets. And demand for EV's is not going to subside in bigger markets like China either. They are all in on it.

I do expect the lithium price to even out as more players get involved but the future demand is there.
Click to expand...

What I was suggesting is that should demand push the entry price up high enough it will close the market. The government intervention will contribute to that and as you mentioned that should signal further intervention to follow.

By last measure we were four or five times short on supply for lithium and cobalt with more natural demand and mandated demand to come.

I think it's a great investment but the added demand is going to lift prices and then people will start listening to the environmental issues associated with it, see the issues around the big reserve in the USA, and when that happens political turning can happen - and they are the ones driving a lot of demand with their mandates.

So there is a risk, keep an eye on sentiment of progressive politicians talking about it - if they start talking about the issues around sourcing lithium and cobalt - jump off.
 
Taylor said:
What I was suggesting is that should demand push the entry price up high enough it will close the market. The government intervention will contribute to that and as you mentioned that should signal further intervention to follow.

By last measure we were four or five times short on supply for lithium and cobalt with more natural demand and mandated demand to come.

I think it's a great investment but the added demand is going to lift prices and then people will start listening to the environmental issues associated with it, see the issues around the big resh, or erve in the USA, and when that happens political turning can happen - and they are the ones driving a lot of demand with their mandates.

So there is a risk, keep an eye on sentiment of progressive politicians talking about it - if they start talking about the issues around sourcing lithium and cobalt - jump off.
Click to expand...

To a large extent I agree with what you are saying. I do think we will see the supply of lithium improve significantly but as you say, it would need to in order to cover the likely demand. This is just one factor (a large one) that will determine the price of EV's though, other factors such as scalability and competition should bring the prices of such vehicles down, or offset other rising costs.

Not that you are, but I do think it is dangerous to use the EV market in Australia as the reference point as we are 3-5 years behind what is going on in Europe. Once we begin to catch up I think you will see a more robust domestic market. From an infrastructure perspective (availability of charging stations) we are challenged but hopefully this will be addressed sooner rather than later.
 
Last edited:
DaRick said:
BTFD again, I suppose.

The start of my month was pretty awful (things have improved since) - so awful that I decided to rethink my strategy a tad.

I had originally intended to place just 3% into the materials/energy sector, but unfortunately the upshot was that I found that I didn't really benefit at all should those sectors have done well. Also, I realised that placing anything more than 12% into any one sector was really concentrating risk unnecessarily. I decided to up my minimum allocation in any one sector to above 4%. I haven't yet acted on materials - IMO as a whole they're going to pop before energy does because rising inflation is much more likely to benefit energy than materials historically, with the possible exception of wheat and iron ore (see below) - but although I detest them as a company, I decided to place AUD$500 in XOM (Exxon Mobil):

1) Zacks recommended them
2) It does get me above the 4% threshold for energy
3) While I think it's unlikely that Russia outright overthrows the Ukrainian regime, there is a decent chance that they secure Donbass/Lugansk if provoked heavily enough, and since Russia is a major oil/gas supplier, they may cut off supply to Ukraine and perhaps their Western allies in retaliation should a war break out - that would cause the price of oil/gas, along with iron ore and wheat (or which Ukraine and Russia are big exporters), to rise
4) XOM, being one of the largest energy companies, has an entrenched competitive advantage + enough reach to exploit such a price rise, and is relatively well-equipped to weather downturns and disinflation because of its dividend aristocrat status
5) Energy is a value sector, and given that inflation and yields are expected to rise in the US over the short-term due to Fed rate hikes, US value > US growth during H1 2022 at least
6) It's unaffected by a rise or fall in the USD (although I'm bullish RE the USD during 2022 because it is a safe-haven currency and those fare relatively well in declining stock markets)

Also, showing my usual lack of nuance, I failed to recognise that while healthcare is indeed a defensive sector, there's a fine line between growth and blue-chip healthcare. I knew that the former would be more volatile, but I didn't recognise how much more - and some companies (like Pfizer) straddle both.

For that reason, I was increasingly unsure whether HZNP was really the right company to weather this storm - it was on the WVOL (min vol) index, but only barely - plus it was also a growth stock, and not quite a large-cap stock, and large-cap stocks fare best during market crashes. I decided to cut my losses and sell it.

I still think that inflation in the US is short-term, because you have a withdrawal of US stimulus + Fed interest rate hikes + inventory pileups. That should ultimately push inflation down, not least because interest rates and inflation are inversely correlated and you'd ultimately have a situation where too little money is chasing too many goods (disinflation/deflation).

However, I didn't account for supply chain disruptions + OMICRON causing demand for medical supplies to remain high despite likely shortages. That leads to a situation where you do indeed have too much money chasing too few goods, thus causing inflation. I do think that stimulus being withdrawn will reduce the amount of money available to chase such goods and thus inflation over the medium term, not to mention that such disruptions will ultimately resolve themselves (likely during H2 2022).

That said, over H1 2022, since the US economic situation is deteriorating while inflation is increasing, IMO you get stagflation because there's still too much money in the economy. A Russo-Ukraine war would aggravate and prolong that situation, since the US imports Russian oil and demand for oil/gas is inelastic. Europe would also suffer stagflation as a result, but their currencies (CHF aside) would fare worse than the USD since they are not safe-haven currencies.

During stagflationary periods, historically (value moreso than growth) healthcare/consumer staples/energy benefit, while consumer discretionary and materials perform quite poorly. Consumer discretionary is obvious - consumers have less discretionary income to spend - but I've come to think that while materials as a whole would underperform due to demand shifting to certain oil/gas (energy) over other commodities since they're the most inelastic worldwide (i.e. oil/gas demand is consistently high worldwide). The same is not necessarily true for other commodities.

However, I've realised that my thinking was too unnuanced and now I recognise that specific commodities might indeed clean up during stagflation anyway, depending on the specific economic conditions. While China's economic difficulties make me disinclined to invest in iron ore companies - particularly Australian iron ore companies - wheat companies may be worth looking into, since wheat demand is fairly inelastic worldwide and so difficulties in Russia/Ukraine might ultimately increase prices.

RE Australia, the same supply chain difficulties plus the economy imploding have created the same stagflationary situation. I think this will force the RBA to raise interest rates within 6 months - maybe before H1 2022 ends. Along with an expected improvement in consumer spending leading to an eventual consumption boom after OMICRON/COVID has been suppressed, this would raise the AUD, as would China stimulating, as expected during H2 2022, thus increasing demand for AUS commodities - but not after they decline first due to USD and commodities being inversely correlated, and the Fed's attempts to raise the USD.

However, Fed interest rate hikes would increase the USD relative to other currencies and the USD has always performed relatively well during stock market crashes due to its safe-haven status, while China 'loosening' would also cause the yuan to decline (yuan has always been strongly correlated with rising AUD/USD), limiting both the extent and length of the AUD's improvement relative to the USD over 2022.

The Fed's attempts to raise the USD via hiking interest rates should cause disinflation in the US eventually (H2 2022), reducing oil/energy/commodity prices. A recession is also expected in the US during H2 2022. Recessions and stock market corrections are strongly correlated, which should drive investors into USD and US bonds due to the associated disinflation, increasing US bond prices and decreasing yields. US and DM stock market corrections are also strongly correlated, so I expect the ASX, along with European markets, to correct as well. This would reduce EURO/GBP relative to USD because neither are safe-haven currencies. I'm less certain about EURO/GBP bonds because of complications RE Russia/Ukraine maybe causing stagflation for longer, rendering investment in bonds - except inflation-linked ones - rather pointless.

My own revised strategy has been to do the following (BTFD = buy the ******* dip):
  • Due to issues RE brokerage, make sure I invest a minimum of AUD/USD $250 in stocks, $500 for currency and $750 for bonds (currency ETF's are up to half as volatile as stocks and bond ETF's are up to 3 times less volatile, so you'd need to spend more to make a capital gain after brokerage has been deducted)
  • To take full advantage of market dips in the future, make sure to invest up to AUD/USD $750 in stocks. Currency/bonds are less volatile, and I wouldn't want to blow too much money on them at any one time, so I've kept their maximum investment amounts to $1000/$1250
  • Raise USDU and UUP while retaining USD, keeping exposure to currency at around 10% of my portfolio (my current maximum).
  • Leave US bond allocations for now - TIPS excepted - because of expected Fed rate hikes raising yields, but increase after H1 2022 and sell TIPS in process if necessary because they're useless during disinflation/deflation
  • Leave EURO bond allocations alone for now because of possible stagflation due to Russo-Ukraine conflict potentially provoking the ECB/Bank of England into raising interest rates sooner than expected - make exception for inflation-linked bonds (WIP)
  • I did purchase $750 in VAF because it was bearish, plus the market appeared to prematurely price in RBA rate hikes, but I think those rate hikes might actually occur now so I'll leave AUS bond allocations alone for now - maybe except ILB
  • Keep asset allocation investment at around 5%, by BTFD in VDGR and AOK
  • Retain TLS despite rate hikes hurting its price because it is Australia's least volatile stock
  • BTFD RE WES because it's a consumer discretionary stock + a high-quality stock + a min vol stock which has both discretionary/staple traits + it might acquire Priceline, strengthening its healthcare investments - not a bad thing during COVID
  • BTFD with QUAL/QLTY/QMIX because they're quality ETF's, and investors tend to cling to those during downturns
  • BTFD with min vol and dividend ETF's (again more attractive during downturns)
  • Don't BTFD with HLTH or ETHI - just let them decline because rate hikes will cut into their price anyway (they're too growthy)
  • Sell HZNP, but retain VRTX/PFE/CL/HSY/NEE (combination of min vol + quality + large-cap)
  • Don't BTFD with AUS ETF's just yet - their heavy materials component + a stillborn economy means they still have further to fall
  • Look to increase investment in WES later in H1 2022 to prepare for improvement in consumer spending
  • BTFD in UMAX/YMAX, because those are covered call ETF's and their yield allows them to outperform in declining/volatile markets
  • Don't BTFD with high-yield bonds (USHY) or REIT's due to declining stock market, with caveats listed below
  • Don't BTFD with EM's due to rising USD, with caveats listed below
  • Don't BTFD with infrastructure, utilities or telco (TLS) over short-term due to expected US/AUS interest rate hikes
  • Nonetheless, retain minimum of 2.5% and maximum of 35% in each investment class to optimise diversification without concentrating too much in any given investment
  • Look to sell off VBND and VAF where possible due to expected rate hikes + being hedged to AUD negatively impacting their prices
  • Retain EWL due to relatively defensive nature + CHF/USD both being safe-haven currencies should somewhat offset USD rise during stock market correction

Factors I now use to time the markets - can be found via CMC Markets (my previous ones were too crude):
  • CCI (should be -100 before buying and +100 before selling)
  • Chande Momentum (should be -50 before buying and +50 before selling)
  • DMI (the higher the green line, the more likely it is that you should sell or buy - if the green line is higher than either a high black/red line in the case of stocks, you should consider selling/buying - with bonds the green line will be much lower)
  • MACD (again shows extent of decline or rise, informing decision to buy or sell)
  • Stochastic RSI (RSI is more stable and thus more valuable in volatile markets; Stochastic is more valuable in stable markets - given market is volatile, RSI should be below 30%/above 70% before you buy/sell)
  • Trend Trigger Factor (+100 denotes a bull market, -100 denotes a bear market, but IMO should consider selling/buying when TTF hits +50 and -50 respectively => reduce by half when dealing with bonds)

Overall, I have about 52.5% invested in stocks and 47.5% invested in non-stocks. I think this is overkill for a young investor like myself in retrospect (maybe should have been 70/30 or 65/35), and I have neglected inflation-linked bonds too much due to ignorance/complacency, but it is what it is.

Thanks for reading. :)
Click to expand...
Awesome write up.

You seem to be an indicators tart like me ?
Most of my time is spent on macro, or backtesting indicators and EA/bots on MT4 against FX pairs.... I'm not self-employed yet so obviously not that good at fx... I used to think the new indicators were the way to go but i've recently come across some RSI based indicators that show your list of indicators makes a lot of sense.

Always looking to learn from your posts. Thanks
 
The Cryptkeeper said:
To a large extent I agree with what you are saying. I do think we will see the supply of lithium improve significantly but as you say, it would need to in order to cover the likely demand. This is just one factor (a large one) that will determine the price of EV's though, other factors such as scalability and competition should bring the prices of such vehicles down though, or offset other rising costs.

Not that you are, but I do think it is dangerous to use the EV market in Australia as the reference point as we are 3-5 years behind what is going on in Europe. Once we begin to catch up I think you will see a more robust domestic market. From an infrastructure perspective (availability of charging stations) we are challenged but hopefully this will be addressed sooner rather than later.
Click to expand...


Scalability and competition should bring prices down, one thing the pandemic has brought is a big uptick in the price of new cars (and used cars) it may be that an acceptance of a new base has been found.

Taylor said:
The demand is already forecast based off government mandated targets on vehicles. They will need to subsidise the cost quite a bit to meet the target or drop the target which will drop the demand.
Click to expand...

I think the natural demand is nearly already there, Hybrids are a better driving experience than the default 4 cyl turbos. The only mainstream holdover in our market will be Dual cab Utes and true 4wd's.

Anyone who has driven an underpowered Hilux or Ranger with a load on the back will appreciate the torque characteristics of an EV and it's not as if those things couldn't carry a range extender if needed.

Personally I still think the big benefit in Aus of Lithium will be home batteries, solar is widely accepted, better home storage is needed. Texas, South Africa, there's enough examples to show a sizable market is there, but that is one area where cost needs to come down.
 
Last edited:
The Cryptkeeper said:
I reckon it opened with a lot of opportunists looking to "buy the dip" and has now run out of steam again.

Volatile times ahead.
Click to expand...

Retail power hour.

I'm a believer in buying at the 75% elapsed mark. Month and Day.
 
I really like Steve Van Meter - his explanations are pretty clear and simplified, to a degree. ( he also has a free daily ETF list called "momentum timer pro" )

Here he talks a lot about the current volatility - its only 12 mins long.
 
You must log in or register to reply here.

Remove this Banner Ad

Back
Top