From @partners_road on X:
Best advice I got from Steve Cohen: Always stay on offense. To do that, you need positive P&L and a ruthless ability to cut losing positions quickly. If you don’t, you play defense. Defense ends up taking all of your time, and you miss opportunities because you aren’t looking. Stay on offense.
And
“Keep your feet moving.” Said that at the end of every month. What it meant was that if you have “dead wood” in your book – stale positions you were just “hanging on to” — move your feet (clear them out). Keep your book fresh, take P&L, stay alert to fat pitches, and stay on offense.
This is great.
If you find yourself playing a lot of defense, just go to cash. Take a break from the desk. Come back to the game when you’re ready to go on the attack again.
It’s both an opportunity set as well as a mindset thing.
If you’re constantly reacting to markets, it means you’re either a bit out of step or you don’t even know what tune the market is dancing to. Maybe you need to update your views, or maybe the regime changed and you haven’t caught on yet, or maybe the table you’ve been playing at now has a few sharks sitting down.
Either way, take a breather. Review your thinking, biases, new info, and the full opportunity set. There’s always another table/market/asset to play in that’s maybe better suited to your approach.
And remember, cash is a position, and sometimes it’s the best one.
HF manager Jim Leitner told Drubny in “House of Money,” which is an excellent book by the way, that “rather than seeing cash as dead money, view it as a call option on every asset in the world.”
I agree.
Moving on… In this note, I’m going to cover our base case for the market over the next 1-2 months. We’ll then go through some key developments to track that will foretell the end of this trend. And finally, we’ll end with the most actionable setups we’re tracking.
YTD Portfolio Performance: +23% ytd
Current Positioning:
- Futures:
- Long NQ, ES, RTY, Silver
- FX:
- Long EURUSD & short USDMXN
- Equities:
- Gold Miners
- Rare Earth Miners
- Defense & Aerospace
- Large Tech
- Crypto:
- Long BTCUSD
- Long ETHUSD
- Long SOLUSD
- Long UNIUSD
- Long SUIUSD
The market is overextended. Seasonality for risk assets is strongly negative for the next two months. Speculator positioning in the Qs is in the 90th+ percentile. Breadth is starting to weaken, and market internals are beginning to diverge lower.
AlmanacTrader points out that “every Nasdaq ‘Hot July’ since 1971, except 1980 was followed by a retreat that averaged -5.8%” over the following 2-3 months.
These are some good-sounding reasons to be bearish.
So are we selling down the book and loading up the shorts?
No.
Why?
Because our weight of the evidence approach says the path of least resistance is still up.
There’s always going to be gripping reasons to not be long a trend. It’s these very narratives that keep a trend going.
Disbelief keeps money on the sidelines. Reality continues to positively surprise the collective investor psyche that tends to overanticipate risks, except for, ironically, when risks are greatest. This drives belief conversion, which drives prices up, preferably in a slow grinding fashion (aka, a Bull Quiet regime, which we currently find ourselves in).
That’s not to say that the above data isn’t notable. These are pieces of the puzzle that deserve attention. We need to watch and see how they develop.
The thing is, a LOT of people are watching and commenting on the cautionary points above. And it seems we have a popular narrative forming around the idea that (1) stocks are heading higher into year’s end, and (2) August and September are seasonally weak and the market very extended, so expect a broad correction soon that will serve as a great buying opportunity.
The funny thing about markets is that “if something is closely observed, the odds are it is going to be altered in the process,” to pull a quote from Kovner.
So I don’t think that plays out at all. Here’s where I think we’re headed instead.
- We’re in the 7th inning of this trend
- Institutions have largely sat on the sidelines, waiting for a pullback
- Fear of materially underperforming / career risk is starting to hit
- They are hoping to buy into the expected weak period of seasonality
- That weak seasonality is not going to come
- Markets are going higher
- NQ > 24,000 = uncle point for the bears
- They’ll pile in. The market will go parabolic for a bit. And then the rug pull will come early Fall
Also, we have a potential Ukraine-Russia peace deal in the cards, a Sep cut from the Fed, the trade war circus moving into the rearview, better than expected earnings from the market, buybacks set to pick up post earnings blackout, etc… All good cognitive cover for these recalcitrant bears to fold on and significantly up their risk.
But, who knows… not me. This is all speculation. As always, we’ll stick to our Trifecta Lens and updating the weight of the evidence, keeping our feet moving and adjusting fire as needed.
MO Heads-Up-Display (HUD) Indicators:
- Trend Fragility and Risk Cycle: Two measures of short and long-term risks (ie, leveraging, FOMO chasing, etc) in markets continue to support the broader uptrend. However, a few of the individual components that measure short-term risk-taking are starting to heat up. But no sell signals yet.
- Market Internals: We are seeing some negative divergences in key internals. These divergences often play out for 1-2 months before a larger correction occurs. This development is still early and could just as easily revert to trend, but this needs to be tracked.
Our Internals Aggregator is still firmly in neutral territory, though.
- MO Liquidity indicator: Still flush and supportive of risk assets.
- Aggregate Breadth: Is at +3. This is still a bullish reading, but it typically coincides with a more volatile uptrend.
- Trifecta Lens Score (TLS): The TLS is a composite of our key macro, fundamental, positioning, and technical indicators. It’s currently at zero, which is a low bullish reading that supports the current trend.
- CoT Positioning:
- Commodities: Crowded longs in Feeder Cattle and crowded shorts in Rough Rice, Soybean Meal, and Sugar
- Equities: Crowded longs in Nasdaq 100 and crowded shorts in Russell 2000
- Currencies: Crowded longs in JPY and crowded shorts in AUD
- Debt: Crowded longs in 30yr UST bond and crowded shorts in 5yr UST Note
Weight of the evidence:
The data + tape say this trend is headed higher — albeit with rising volatility — and there’s an increasing probability that the trend goes parabolic as bears capitulate and join in. We are also starting to see the early signs of deterioration that often precede larger corrections by 1-2 months, but it’s still all too early to call for a coming top—just something we need to track.
Final thoughts and trade setups
The Qs look like they’ll push to new all-time highs this week. We’re long and will be adding when given setups to do so.
One thing I’m tracking closely is breadth.
I mentioned above that while our breadth aggregator is still in bullish territory, we’re seeing some individual components beginning to slide.
Here’s the % of SPX members above their 50 and 200-day moving averages. They’ve both come down off their highs and are currently trending lower. But, overall, they’re still quite strong. I’d become more concerned if we see the 50d (tan line) break sharply down towards the lower horizontal.
Russell 3K breadth tends to give a better lead since it’s a larger universe of stocks. We see a bit more deterioration here, but not enough to want to turn defensive, yet. So, just something for us to keep an eye on.
I’d been writing about the developing long opportunity in the Nikkei for a few months now. It looks like the 18-month sideways range has finally completed with a breakout and an all-time closing high last week.
We were bucked out of our first long attempt two weeks ago, but we’ll be taking another swing this week.
I think crypto will be the play over the next two months.
ETHUSD is breaking out from a 4-year symmetrical triangle. The measured move target on this is 6,500+. We are long and will be looking to add.
Gold has stopped us out on breakout failures to both the upside and downside over the past month. But the compression regime continues to develop, and we’ll gladly take another setup if one comes.
We’ve significantly pared back our single-name equity risk over the past two weeks. Now our book is barbellled in long NQ/ES/BTC/ETH with long GDX/REMX/SHLD/MXN/EUR.
Another area of the market we’re looking at is Lithium (LIT ETF pictured below).
LIT fell nearly 70% from its 21’ peak to its bottom earlier this year.
I’m willing to bet that this is the cycle low for the sector.
SLI fell over -90% and is attempting to break out from its 18-month base.
Same with PMET.
There’s a lot of deep value in this space.
Brandon has some favorites that he’ll be sharing with the group soon.
That’s all I got for now.
Stay frosty and keep your head on a swivel.
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