Weekly Wrap

Market Update

Calendar Icon   Friday, 12th March 2021

ASX 200 Index (XJO)

This week we take a look at the XJO with the Advance / Decline line shown on a yearly basis. Since the low in March 2020, the rally in the XJO has been accompanied by a healthy increase in the number of issue advancing compared to declines.

This lasted until the end of February 2021 and we can see on the chart below that despite the index trading sideways, the advance / decline ratio has fallen. Momentum is waning for the XJO and the call for caution is still warranted.

XJO Chart

Afterpay Ltd

The Buy Now Pay Later sector has benefited tremendously from the COVID-19 lockdown with the stay at home and work/shop regime. The darling of that sector has been Afterpay, which has grown to be worth $32bn in market cap.

This rally has been entirely divorced from any form of fundamental analysis for the company, which is not forecast to earn a profit for at least 2 years. In fact, Afterpay has raised over $2bn in capital in the past year (with one of the founders recently selling down part of his stake). The market is attaching a large amount of belief in Afterpay, which is not yet justified.

The chart below shows Afterpay has just completed a Head and Shoulders pattern, which is not a healthy sign for further gains. With the end of the welfare packages in March, coupled with a release of a vaccine for COVID-19, the shop at home mentality may start to wane.

Afterpay Chart

PPK Group Ltd

We have previously recommended buying PPK shares as we believe they offer a unique chance to invest in the nano technology sector. The company is at the forefront of developing new technologies that will disrupt existing technology across a wide variety of sectors.

The company has just announced a joint venture with Amaero Alloys, Deakin University and Rio Tinto Ltd, to develop a “super strength aluminium alloy”. They also announced an expansion of their manufacturing hub with a $20m partnership with the Victorian Government. You can read more about these announcements here.

PPK is at the forefront of the nano technology business and it may even have an application for NASA. To read more about this click here.

PPK Chart

A 40 year Credit Boom

Bloomberg

U.S. Core CPI Rises Less Than Estimates, Easing Inflation Alarms

By Reade Pickert 10 March 2021, 11:34 pm

Mainstream economists have been telling us that rising inflation was behind the rising bond yields in America in the past 6 months. The US 10 year bond has risen from 0.54% to close to 1.6% in that time.

Economists tend to try and rationalise their forecasts, which means the believe that an event causes another event to occur. Therefore, rising yields must be caused by rising inflation, for example. However, the headline above, from a Bloomberg article, shows us that inflation is mostly subdued.

The core consumer index (excludes food and energy costs) rose just 0.1% from a month earlier. Overall CPI rose 1.7% from a year ago, less than the 2% forecast. You can read the story in full here.

What does this mean for markets?

The chart below shows us that yields have been falling for 40 years, which has coincided with the largest credit boom in history. During that time, rapid increases in yields have accompanied share market collapses.

Yields have tripled in the US in just 6 months. If there is a correlation between rapidly rising yields and market sell-offs, we will soon find out.

10 year Treasury note yield