A Record-Breaking Market

Back in October, I wrote a piece for Real Vision titled Market Tops and Archimedes’ Lever. I talked about why I was bullish the market. If you can remember, those four very long months ago, people were very — and I mean very — bearish. I believe I was one of the only bulls on RV at the time.

Here were my concluding thoughts from the report:

We’re moving off the backend of the fiscal impulse into better base effects (the past data in which YoY% is measured against). This means easier hurdle rates going forward.

And finally, auto-demand. It was a one-off event and global demand for car vehicles will improve going forward (the data is already showing this).

So, yeah, spiking repo rates, ISM in free-fall, and inverted yield curves are scary things. But this is the market; there’s always something to fret about. That’s what builds the wall in which stocks climb.

The market is a discounting machine and looking out 6-12 months, things look better than they are today. China will stabilize, the Fed will stay easy, the global manufacturing recession will soon end. And we’ll return to a very low but positive growth world — which just so happens to be the best type of environment for risk assets.

I know that probably reads as complacent head-in-the-sand thinking to some of you. It’s not easy taking this position, which means it’s more than likely the correct one. Markets are funny like that.

Trends are fed by disbelief in the prevailing fundamentals. A market climbs or falls by the incremental adoption of the narrative that spawns around these fundamentals. A bullish trend rises because bears keep getting caught short and forced to cover while former bears and those on the sidelines decide to get long.

The more people buy into a trend the more convincing and pervasive the narrative supporting that trend becomes, creating a feedback loop. Eventually, that feedback loop drives prices to a local extreme. This leads to bulls taking profits and bears testing shorts. Prices swing back in the other direction, and the process begins again. This is the proverbial wall of worry in which the market climbs. A constant swing of the pendulum along a direction trend.

Well… the pendulum has swung quite a ways since last October.

We’ve gone from staring down the barrel of recession to taking out the Jan 18’ all-time record high spread on the U Michigan Stock Market Confidence Survey (chart via SentimenTrader).

We’re also seeing:

    • Options market gone wild
      • According to SentimenTrader “leveraged traders of expiring contracts have never held so much exposure to a rally in stocks… With the surge in call buying, their total outlay has exceeded more than $7 billion in premiums paid each of the last two weeks.” Which is “far beyond anything we’ve ever seen before.”
      • 20-day Put/Call ratio at lows hit only 3 other times over the last 6-years.
      • According to Charlie McElligott “Investors have gotten extraordinarily (and mechanically) long the market via options and the overall index trade to ATH, with Delta across the S&P 500 currently in the 99.5th percentile
      • And Goldman Sachs points out that single stock option notional volumes as a percentage of shares are at 91%. The highest level ever.
    • Short interest in the SPY is at its lowest point since early 2007.
    • Speculative retail plays such as SPCE and TSLA are seeing record-breaking trading volume

And on and on it goes…

So a few things are true right now:

    • Speculation is reaching a fever pitch
    • The SPX is in a buy climax but buy climaxes tend to last longer than anyone expects
    • Bulls are still in control and the path of least resistance remains up, though this could change any day

Long bonds have so far given us a free hedge against our long positions. As long as price stays above the center-line of that wedge (call it the 162’06 level), I’m sitting in my large long position. If it falls below, I’m cutting back to my core holding.

My current base case is that the market is about to enter a period of extended weakness. This won’t be the market top everyone is looking for but could turn into a significant retrace due to the extreme trend fragility.

The longer-term path of least resistance remains up. It’s important to remember we came into this year with Wall Street strategists the most pessimistic on the stock market in 15-years.

The market has a way of making fools out of those in the consensus. This year will be no different.

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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.

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.