Hi all. This is Craig Shapiro here and I am excited to be joining up with LaDucTrading to launch our EDGE product.
This is a table I use which looks at various asset classes, including equities, FX, fixed income, commodities as well as sector ETFs in order to get a sense of which sectors are currently overbought and oversold. The percentile column represents the degree of overbought or oversold vs. a security’s historical pricing based on a proprietary technical indicator that I developed which looks at the 1-month and 3-month standard deviation of any security’s performance as well as the current relative strength of that security. This indicator often provides an interesting perspective on the degree to which any security is overbought or oversold and helps me paint a mosaic of the underlying market narrative and what is being priced in. While not perfect in calling reversals, as the degree of overbought or oversold can alleviate itself in time or price, this indicator helps me create trade setups, particularly into larger macro catalysts that may lead to a reversal.
As you can see below, broadly speaking, energy remains in the overbought camp, both on the commodity and ETF side, as we have been mentioning in the room for the last several days. We can also see that short term yields are incredibly overbought (bonds incredibly oversold) and some growth-related ETFs like XLC and FDN are in the oversold camp as well.
This indicator has the best hit ratios for reversals when we are at extremes and when we are approaching large catalyst events, so into the CPI event on Thursday, with bonds incredibly oversold (and 2 year yields about as overbought as we have seen them on my metric for the last several years), we can assume that fixed income markets are very much pricing in a hot CPI print and the Fed’s hawkish reaction function that would come from this reading. As a result, it will likely be challenging for the bond market to significantly sell-off further on a scorching CPI print and if we for some reason get a soft print, we should expect a rapid rally in front end fixed income as investors would be very offsides.
I will be using this indicator in future posts so I wanted to put it out there today as I launched my first official EDGE post. More to come. Feel free to email me at craig@laductrading.com or message me in Slack with any questions.
