A Rare Buy Signal In Tech Stocks… [DIRTY DOZEN]

Oct 9

Understanding and dealing correctly with the trade-off between risk and return is a fundamental, but poorly understood, challenge faced by all gamblers and investors.~ Edward Thorp

In this week’s Dirty Dozen [CHART PACK], we talk average bear markets, playing politics with national security, a rare breadth thrust in tech stocks, extreme short positioning in bonds, small caps at small valuations, and uranium names with nuclear fundamentals, plus more…

@EnronChairman shared an illuminating graph last week on what it feels like to be a long only investor in this market…

BofA’s latest Flow Show highlights with actual highlights by me.

The overt politization of a national security asset in order to buy votes (in this case the SPR) during a time of real and rising global threats, is bad precedence and a dangerous game.

An updated refresher on average bear markets with and without a recession. We’ll be tipping into a recession next year if the Fed stays on their current course, so focus on the red line (chart via BBG).

The Tech sector triggered a rare MACD Buy Signal last week, where over 80% tech stocks have had a MACD buy signal within the past 10-days.

This marks only the fifth time this signal has triggered over the past 30+ years.

This graph shows historical returns over the following month of trading. Tech stocks were higher every time one month later with an average return of 13% (note: this graph shows 15 instances but that’s because these buy thrusts come in multi-day clusters, which I count as single instances).

I’m not saying it’s a good idea to go and buy beaten down tech stocks now. Just including this for context and to keep us openminded to the potential for a large rally, like the one that occurred during the 00’-02’ bear market.

For tech stocks to rally we’d need to see bonds put in a durable bottom. Something they’ve so far failed to do. Interestingly, positioning is getting very one-sided. The chart below shows the aggregate speculative positioning (OD green line) across all maturities (h/t Cameron Crise). I wouldn’t fade the current trend. It’s parabolic and parabolic moves last longer than most expect. But they also tend to end in violent reversals, so something to keep in mind…

Smallcaps are cheap, both on a nominal and relative basis. It’s too early to be aggressive but it’s a good time to be bargain hunting and accumulating shares (h/t @MikeZaccardi for the charts).

Historically, when smallcaps have traded at a forward PE of 10x, they’ve seen double-digit annualized returns over the following decade.

@quakes99 shared a good thread of charts outlining the long-term bul thesis for Uranium (link here).

We’re only in the early innings of what’s going to be a broadbased and secular bull market in commodities. The main driver, as is always the case, is the CAPEX Cycle.

The below list shows the top 20 best performing stocks this year that trade on US exchanges with a marketcap over $2bn. Notice the industries (oil & gas, coal, biotech, copper). That’s called leadership change. What’s outperformed in the last cycle is unlikely to outperform in the next. This list is a good starting point for digging into new cyclical winners.

Thanks for reading.Stay frosty and keep your head on a swivel.