A Bear Trap In Bonds…  [Dirty Dozen]

If you have an inflexible image in your mind of an opponent, then whenever he changes, your evaluation of him will be wrong. If you have an inflexible image in your mind of yourself, then whenever you change, your evaluation of yourself will be wrong. For up-to-date evaluation, there is no time but the present. ~ Tommy Angelo

In this week’s Dirty Dozen [CHART PACK] we go through market positioning, a developing setup in bonds, some Agg shorts, and a long in small-caps, plus more… 

1. Aggregate positioning going into the week shows speculators continue to be very short USD, long precious metals, increasingly long energy, and crowded short in bonds. 

2. The most crowded longs are cotton, Dow Jones,  and EURUSD. For shorts, it’s the DXY, 5yr, and 2yr Treasuries. 

3. I’ve been closely tracking the setup in Bonds for the past month. I think buying bonds will be a big trade going into the year’s end. But we need to be patient with these things and wait for the tape to signal a likely bottom is in and for our leads to confirm. 

I’ve been waiting (hoping) for a puke below the YTD range sparking a bear trap reversal. And we may see this trap get put in over the coming weeks.

4. Copper/Gold (blue line) is beginning to diverge lower (black line is 10yr yield). Ideally, we’ll start to see our other leads begin to trend lower while yields creep up. 

5. I’m looking for a move similar to the one we saw in the lead-up to the major bottom in bonds in November of 2018. Yields put in a double top while all of our yield leads traded down.

6. Speculators are crowded long in cotton and the daily chart put in a potential double top last week. This is not a bad R/R spot to get short with a risk point nested in right above recent highs. 

7. Cotton is coming off near 2std above its 20, 50, and 200-day moving averages.

8. Cocoa is another market coming off of crowded spec positioning and extreme technical extension. I’d look to short on a bounce back to or slightly above the Bollinger Band midline. 

9. Cocoa trade backdrop: technical overextension (2std+ > 200dma), very crowded spec positioning, and money manager sentiment in the 100th percentile, plus valuation oscillator in the 100th percentile as well. 

10. I don’t have a strong view on equities at the moment. The bearish positioning and recession narrative that made us lean long all year has been played out and the market is trying to find a new narrative to fit the bullish tape. 

Market internals are still mostly positive and so I’d think this dip gets bought here. But that’s a weak opinion, weakly held. 

Cycle and seasonality have flipped to a headwind. Combined with the Bull Volatile regime and Trend Fragility north of 80%, we should expect a bumpier ride for the second half (chart via NDR). 

11. Someone sent me this chart from HSBC showing multi-asset fund equity exposure surging. No doubt these clowns are piling into MSFT, AAPL, NVDA, and GOOGL at the moment, so we should look for a developing top in those names. 

12. If your’re looking for a quick swing trade the setup in the Russell is playable, though this trade could be nullified by morning time when this prints. But we have a pullback double bottom to the lower band within a Bull Quiet regime. Specs are short and you can nest in a stop tight, right below Friday’s low. 

Thanks for reading.

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

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He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

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Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

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