“Part of what people insufficiently distinguish, or confuse, is the difference between frequency and magnitude — that is, how often you’re right or wrong versus how much money you make when you’re right and how much money you lose when you’re wrong” ~ Bill Miller
In this week’s Dirty Dozen [CHART PACK] we look at monthly charts, major equity tailwinds, improving global breadth, a short setup in bonds, and a bullish European play, plus more…
1. The SPX put in a large lower tail and closed near its highs for August. This is a good monthly candle. The bulls are still clearly in control.
2. From Fidelity Investments “After a volatile few years, oil and rates are now down double-digit amounts over the last twelve months, something that hasn’t happened since 2020. While the move is a bottom quartile event for both, the two moving together at this pace (both up and down) happens only 10% of the time. The impact on the market isn’t coincidental, big moves like this impact returns with a lag. Meaning, the statistical influence is mostly seen over the following year.”
3. Continued: “The signal itself is somewhat asymmetrical: oil and rates going up more than 15% isn’t necessarily bad for stocks (they return 5% the year following), but both going down is quite good, historically offering almost 20% returns. That illustrates the magnitude of the tailwind we’re currently seeing. Importantly, those strong returns happen even though both oil and rates do tend to bounce back after falling this much. With stocks, knowing a rate “peak” is in, can often be more important than the direction of rates over the next year.”
4. Lastly: “Technology capex has picked up in the most recent quarters and is now higher than last year. Despite that, capex relative to sales is still declining and quite muted versus most historical comparisons, including the late 90s. Restrained capex is one of the glaring data points that makes the Technology setup different this time… As a result, top quartile free cash flow generation means the stocks are still cheap (bottom half of the distribution) on free cash flow. This is even more true following the recent correction. Valuation is not a unified headwind for Tech; on some metrics, it’s a potent tailwind.”
5. Improving global breadth via Nautilus: “Our proprietary index of global market breadth is signaling a powerful signal. Currently, over 87.5% of global indexes are in bull market territory, defined by advances of more than +20% from prior declines of -20% or more. Historically, such widespread participation has been a strong indicator of robust equity returns across world markets.”
6. We are bullish and buying here. However… one thing we’re keeping a close eye on is the continued divergence of market internals. Our internals aggregator is close to triggering a short-term sell signal. And primary bull trends tend to not last long without the proper internal leadership (ie, high beta vs low beta, SOXX vs SPY, Discretionary vs Staples, etc…)
7. We’ve turned more constructive on bonds over the intermediate to longer term. But the Aug monthly candle is fairly bearish with a large upper wick and a failure to close above its midline.
8. Bonds are also working off overbought conditions as well as crowded small spec positioning which is the 100th percentile on both a 26 and 260 week basis. This puts the odds in favor of sideways to down chop over the near term.
9. We’ve made a quick buck on our USD shorts (long CAD & EUR) over the past few weeks. But the DXY is now at long-term support and is oversold on a short term basis, which means there’s high potential for some reversion to the mean over the next couple weeks. How DXY trades here will be a big tell on whether this is the start of a new trend or a trap…
10. From BofA “…the last 6 times private sector share fell <40%, recession followed (Chart 2); dominance by gov’t & friends (education & health) not bullish for productivity (Chart 3)”.
11. Brazil, Canada, Japan, and Italy were the top returning country indices last month.
12. Surprisingly, Italy has one of the better looking long term charts with a recent breakout from a 10yr+ sideways channel. The table from Koyfin below shows that EWI is heavily weighted to financials and industrials, with Ferrari (RACE) its largest holding.
Thanks for reading.
