A Contrarian Buy Signal Is Triggered… [Dirty Dozen]

Don’t have an opinion. We used to have a saying in Hong Kong, “Should’ve been up, but it’s down, so short it; should’ve been down, but it’s up, so long it.” That trading philosophy became the basis of what I wanted to do: When the tape is telling you something, don’t fight it; go with it. ~ Jason Shapiro via “Unknown Market Wizards”

In this week’s Dirty Dozen [CHART PACK] we discuss the latest contra-buy signal, go over the route in bonds and what it means for stocks, look at the historic selling pressure in emerging markets, and end with a short oil pitch, plus more… 

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1. Here’s the latest BofA Global FMS summary with highlights by me.

2. BofA’s Bull & Bear Indicator triggered an official buy signal last week. BofA writes  that “after 20 BofA Bull & Bear Indicator ‘buy signals’ since 2002 median returns following 3 months (Table 1): US stocks 5.4%, global stocks 7.6%, stocks vs IG bonds 9.1%, HY bonds vs Treasuries 6.4%.”

3. Despite the buy signal, this market needs to see bonds find a floor (yields hit a ceiling) before equities can catch an enduring bid. 10s are bumping up against their lower monthly band, though I suspect we may need to see some more risk-off before real money steps in and puts a bid under bonds. 

4. BBG points out that “the Federal Reserve’s real-risk premium — which captures the uncertainty that future interest rates will diverge from expectations — is now around 1.46%. That is an occurrence so rare that it could statistically be expected in fewer than 50 days on a sample spanning 10,000 days.” 

5. BCA’s spin on the Sahm recession indicator. This one uses the 3-month average of the unemployment rate of job losers not on temporary layoff. A recession signal is given after a 0.20% rise off its 12-month low. 

The current reading is “close enough to its recession trigger point to be activated this year” writes BCA. 

6. If small-caps fail to reverse their technical breakdown by the end of the month, then it becomes much more probable that the broader market soon resumes a cyclical bear. 

7. And a not-so-comforting fact is that specs were buying this dip in the Russell last week. 

This tells me to take the BofA buy signal with some caution. It seems there’s some growing complacency in this market, which contrasts with the price action. 

8.  If I’m wrong and this selloff proves to be short-lived then EM is worth looking at for a swing. 

SentimenTrader writes “The chart below shows this 50-day average net breadth metric expressed as a percentage of the total number of stocks in the index. It has surpassed -10%, one of the most extreme figures in nearly 30 years. That woeful stretch has also pushed the McClellan Summation Index for these stocks to an extremely low level. Both indicators rank in the bottom 5% of all days since 1995.”

9. Historically this has led to some pretty good forward returns. Here’s ST again “After the 50-day net breadth indicator surpassed -10% of issues, the Emerging Markets Index tended to rally consistently for up to three months later. There was only one loss larger than -2% over the next three months, though a few morphed into painful longer-term losses. The last four signals were superb for bulls.”

10. Crude is entering its weakest period of seasonality while positioning and sentiment are at levels that typically mark poor forward returns over the short term. 

11.  Since our book is primarily in cash, long USD vs CNH & MXN, long oil names (TDW and VIST), and long uranium, we’ll look to get long DRIP the 2x leveraged E&P ETF in order to hedge out our exposure to a pullback in oil. 

12. The large negative divergence in our yield leads continues. The setup here continues to look very similar to what we saw in the lead-up to the major bottom in bonds in late 2018. 

It will likely take some more pain in the equity markets to get us there, but we’ll have to keep an eye on these as there’s a good chance that bonds are gearing up for a big reversal within the next month or two. 

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

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

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.

Alex Barrow

Macro Trader

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.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

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