A Risky Proposition… [Dirty Dozen]

In chess we have the obligation to move; there is no option to skip a turn if you can’t identify a direction that suits you. One of the great challenges of the game is how to make progress when there are no obvious moves, when action is required, not reaction. The great Polish chess master and wit Tartakower half-joking called this the “nothing to do” phase of the game. In reality, it is here that we find what separates pretenders from contenders. ~ Gary Kasparov

In this week’s Dirty Dozen [CHART PACK] we look at the troubling flip in our yield leads, talk about the diverging short and long term technical signals for stocks, walk through the latest CoT data, pitch a long copper and a short USDJPY trade, plus more… 

1. We saw a big jump in leading yield indicators last week. This isn’t what you want to see if you’ve been looking for a buyable bottom in bonds. Also, small specs continue to set their money on fire trying to fade this move down in bonds (yields up). 

All this means that there’s still likely plenty of fuel left to drive this bond move lower.

2. Last week we pointed out the troubling signs we’re seeing in longer-term breadth indicators. Another bearish development has been the increasing willingness of large specs to buy into the dip, or at the least not sell into it. Our Large Spec CoT Oscillator crossed the 90% threshold last week. The highlighted spots mark past >90% sell signals.

3. With that said, shorter-term indicators of breadth, overbought/oversold, and positioning put the odds in favor of a short-term bounce. How long this bounce can hold will depend on the action in bonds. And as we pointed out above, the jump in yield leads isn’t exactly comforting. 

4. Our Market Internals also favor a bounce and bullish trend continuation. So we’re still not seeing a fat pitch for a sell setup. But neither are we seeing a lot of positive confirming data points. It still reads like a good time to continue to tighten up stops, pare down risk in names/exposures that aren’t working, and wait for clarity.

5. Breadth across the market, sans energy, is deeply oversold over the short-term and looking increasingly unhealthy over the longer term (% of stocks > 250dma).

6. Here are the latest relative performance trends and market regimes.

7. Specs are bullish SPX, crude, cocoa, and cotton and bearish wheat, copper, and AUDUSD.

8.  Here’s our multi-chart view of the conditional setup in copper. Specs are short, sentiment is near multi-year lows, valuation is in the sub-10th percentile, and seasonality is currently neutral.

9. It’s also in a major compression regime with its weekly Bollinger Band compressing to its tightest range in four years. Similar compression regimes in the past led to large breakouts.

10. We’re looking into ways to play a potential accelerating unwind in risk, should bonds fail to find a bottom and long-term breadth continue to deteriorate. Short USDJPY is one potential. 

This chart from Sentix shows Specs are crowded short JPY while their Strategic bias indicator shows improving sentiment to own yen (this is a confirming positive signal for JPY). 

11.  USDJPY’s real effective exchange rate is at 40yr+ highs while odds are increasing that the BoJ will be forced to lift their rates off the floor in the coming months.

12. With all that said, this isn’t a tape you’d want to fade yet. Momentum still strongly favors upside continuation. We’d need to wait for technical weakness or a news failure event before we could start probing to the short side. But worth keeping this one on your radar. 

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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