Palladium Looks Expensive (Fundamentals)

Ganalytics

Ganalytics

Hello all,

First post here, and I'm looking to hear some thoughts on palladium. My general thesis is that palladium has simply stretched itself way beyond any measure of fair value, and I'm waiting for a pause in technical momentum to short.

I wrote a post a few days ago (https://www.ganalysis.com/palladium-looks-expensive/) that details my thoughts using a data-driven approach to fundamental analysis. In spite of some of the positive narratives (EU/China shifting away from diesel, low inventories, market deficits, and Russia concerns), palladium has ignored the negative macro backdrop (cooling global auto market, rising interest rates, and a strengthening dollar). Further, even though palladium is enjoying the trend towards gasoline autos, it's now trading at over a 30% discount to platinum.

In sum, while the balance of the fundamentals do indicate palladium should be strong, it is already soaring above all time highs here, and I think a significant correction is in order. While rates pulled back recently, my core argument remains that palladium is simply overvalued, and once technicals show any sign of weakness, I'm looking to short. Anyone have any thoughts?
 
Ganalytics said:
Hello all,

First post here, and I'm looking to hear some thoughts on palladium. My general thesis is that palladium has simply stretched itself way beyond any measure of fair value, and I'm waiting for a pause in technical momentum to short.

I wrote a post a few days ago (https://www.ganalysis.com/palladium-looks-expensive/) that details my thoughts using a data-driven approach to fundamental analysis. In spite of some of the positive narratives (EU/China shifting away from diesel, low inventories, market deficits, and Russia concerns), palladium has ignored the negative macro backdrop (cooling global auto market, rising interest rates, and a strengthening dollar). Further, even though palladium is enjoying the trend towards gasoline autos, it's now trading at over a 30% discount to platinum.

In sum, while the balance of the fundamentals do indicate palladium should be strong, it is already soaring above all time highs here, and I think a significant correction is in order. While rates pulled back recently, my core argument remains that palladium is simply overvalued, and once technicals show any sign of weakness, I'm looking to short. Anyone have any thoughts?
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Rhodium is hitting multi year highs as well. Been nibbling on platinum on the long side on ideas of the substitutability of Platinum vs Palladium for catalytic processes. Historically, palladium has been much cheaper compared to platinum. However, last week a supply and demand report on platinum showed an expected inventory build of 50,000 ounces for 2019. If we go into global recession, speculative and industrial demand could drop, leading to lower prices.

Now to palladium. Hopefully you will wait for some signs of a top before getting chewed up with stops like I have trying to catch bottoms on platinum. I am beginning to appreciate that I'm not really trading a commodity or a stock. Rather, I am trading people's psychology. This is why fighting trends, other than very brief intraday reversion to mean trades, is futile from an profitability standpoint.
 
Ganalytics said:
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In sum, while the balance of the fundamentals do indicate palladium should be strong, it is already soaring above all time highs here, and I think a significant correction is in order. While rates pulled back recently, my core argument remains that palladium is simply overvalued, and once technicals show any sign of weakness, I'm looking to short. Anyone have any thoughts?
More...

I suppose the two factors to look at on the fundamental side are A) Where is the majority of palladium being mined and what is their output outlook looking like, and B) what is the projected manufacturing demand for catalytic converters?

All time highs don't always lead to lower moves the next day...They can easily lead to higher highs. We've witnessed that in equities for the last 10 years in general.

Lighter physicals like platinum and palladium, which are so strongly correlated to supply and demand, have always fascinating me.
 
Overnight said:
All time highs don't always lead to lower moves the next day...They can easily lead to higher highs.
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Totally agree with this, which is why I'm on the sidelines right now. I'm more making the argument that there is a fair value / "right price" that is tethered to the fundamentals. I've quantitatively modeled that fair value (taking into account macro and specific features of the palladium market) several different ways, and Palladium has dislocated from those models.

What's that mean for a trade? Not much for now, but it allows me to be more aggressive in looking for a short- maybe a high-volume rejection from a swing high or some other signal that would generally be too weak to "call a top" on a major trend like this.
 
I absolutely believe that Q1 will be negative.

When did you realize that you are, quite possibly, the best trader in the history of History?
 
SunTrader said:
Fair value = price
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That's one argument, but that would mean there was no dot-com bubble, not tulip-maina, no bitcoin bubble, etc. In some sense, "fair value" is whatever someone is willing to pay (the price), but I don't believe that's the most useful way of approaching trading. It completely ignores the human element (which includes biases, being wrong, herd mentality, and other psychological factors that underpin technical analysis). If you believe in technical analysis, you implicitly believe that the price does not equal fair value. Otherwise, prices would just instantaneously adjust to all available information.

It's the inefficiencies of the market that enable technical analysis and fundamental analysis to work. In fact, if they didn't work, there would be no speculators, hedge funds, analysts, etc. involved in the markets at all, because there would be no profits to be made (the price is always right). However- if none of them were in the market, how would prices ever achieve efficiency?

The efficient market hypothesis is self-contradictory if taken to the extreme of "prices are always fair value", because market participants need an incentive to put their analysis and brain power into the market. If prices were always fair value, there would be no exploitable inefficiencies to profit from, and all of the brains and analysis would be in other fields. A market without those profit-seekers would cause any notion of efficiency to collapse on itself, and then you're left with an inefficient market.

More accurate is that many participants are active in the market, all with different opinions and objectives. The aggregate of their actions results in the current price. Just as technical analysis seeks to profit from that price being "wrong" (it's going higher!), fundamental analysis does the same, and judging a fundamental fair value is one approach to that.
 
Ganalytics said:
... If you believe in technical analysis, you implicitly believe that the price does not equal fair value. Otherwise, prices would just instantaneously adjust to all available information.
...
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That.

Yes.

Exactly.

Fair value is what someone is willing to pay. At that moment. And the next and the next.

Otherwise when is price exactly or even close to exactly fair value - for very long. Just about never.
 
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