A Negative Wealth Shock…

“We’re in the business of making mistakes. Winners make small mistakes, losers make big mistakes.” ~ Ned Davis

Summary: A short-term bounce in US equities is possible, but we remain neutral to bearish long-term. Dips should be traded, not invested in, as positioning and flows contradict the fear reflected in sentiment data, indicating more volatility ahead. In contrast, European indices are poised for a long trade. While our Macro Implied Regime model suggests a low recession risk in the next six months, macro data hints at increased risk by year’s end.”

Alright, let’s get to it.

1. We run two portfolios in our Collective: the MO Macro portfolio, which is up +10.3% ytd and is run by Brandon and me; and our Systematic Macro portfolio, which is run by Chris and is up +2.5 % ytd versus the S&P’s -5%. We alert all trades in real time for both ports within our Collective Slack. Chris puts out a weekly Market Overview where he updates what each of his systems are signaling for each market. You can watch the latest one here.


    2. A short-term tradeable bottom is likely in… Here’s the VIX3m / VIX spot looked at on a divergence basis from the market. It triggered a buy signal this past Friday.


    3. The percentage of R3K stocks trading above their 50dma dropped below 20% last week. But those above their 200dma are still above 30%. More significant bottoms tend to form when both are well below the 20% threshold.


    4. The percent of semiconductors trading above their 200dma dropped to 7% last week. Green highlights mark every time they’ve crossed below 20% over the past 15 years.

     
    5. The percentage of S&P 500 sectors trading above their 200dma also dropped below 20% last week.


    6. So we’re seeing an increasing amount of oversold levels across both price and breadth. But… this just means that the forces of mean reversion will start to exert some positive pressure on price over the short-term. For us to turn bullish on the market — at least for anything greater than a short-term trade — we need to see a shift back to a strong breadth regime and preferably one accompanied by some breadth thrusts, indicating the bulls are back in control.


    7. As of now, our operating belief is that, at best, we’ve entered a large, volatile sideways trading (topping?) range that will play out for a number of months. And at worst, we’re entering a new market regime with significantly more downside ahead.

    One worrying point is that while some soft survey measures of sentiment (AAII for example) are showing max bearishness, actual positioning data and flows, such as the BofA Bull/Bear below, CoT for the SPX and NQ, and Total Put/Calls, are either neutral or quite long/bullish.


    8. To that point, here’s an interesting study from SentimenTrader:

    “When 50% or more of stocks in the Technology and Consumer Discretionary sectors closed in bear market territory with the S&P 500 within 30 sessions or fewer of a multi-year high, the world’s most benchmarked index exhibited unfavorable win rates and returns over the following six months.”


    9. Here’s two notable macro charts shared last week, one from RenMac and the other Warren Pies. Warren tweeted:

    “NEGATIVE WEALTH SHOCK…B/c households are massively OW stocks, the current 10% market decline has created a wealth shock equivalent to 12% of GDP…10% corrections are typical (53 since 1950)… But, wealth shocks are rare (13)…The economy is more vulnerable to a stock decline.


    10. The macroeconomic landscape is growing more worrisome, with the possibility of a recession in the latter half of the year increasing. While our Market Implied Macro Regime chart currently shows only a 5% chance of a recession in the next six months, this outlook can change rapidly.


    11. On the single equity side, the team and I are primarily focused on real asset exposure (miners, producers, etc…). Here’s a name we’ll likely be buying a starter position in soon, Sylvania Platinum (SLP:LSE). Brandon wrote them up last year (link here).


    12. Buy Europe over US… Last week we noted the failed breakout setup forming in EURO STOXX 50. Friday gave us the signal to put in a buy stop to see if the market can pull us in long.

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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.

    AK

    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.

    You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.