A Sign of Increasing Volatility… [Dirty Dozen]

Remember this: When you are doing nothing, those speculators who feel they must trade day in and day out, are laying the foundation for your next venture. You will reap benefits from their mistakes. Speculation is far too exciting. Most people who speculate hound the brokerage offices or receive frequent telephone calls, and after the business day they talk markets with friends at all gatherings. The ticker or translux is always on their minds. They are so engrossed with the minor ups and downs that they miss the big movements. Almost invariably the vast majority have commitments on the wrong side when the broad trend swings under way.  ~ Jesse Livermore 

In this week’s Dirty Dozen [CHART PACK] we talk Bull Volatile regimes and topping processes, bond business, a sell signal, cheap oil and gas plays, plus more… 

1. The SPX is in a Bull Volatile regime. As its name suggests, BullV regimes are characterised by higher volatility than Bull Quiets. A Bull Volatile is also a prerequisite for a major top. Last week’s action is indicative of this market regime. 

2. The 3m/1m VIX curve forewarned of last week’s dip (bottom right chart). But as I wrote in these pages recently, the market internals remain supportive of the broader trend up. We’re not seeing any sustained negative divergences, yet. And things like Cyclical vs. Defensive (green line on top right chart) are positively diverging higher. This is not what you see at a major top. 

3. This doesn’t mean the market can’t/won’t sell off more from here. We are in a Bull Volatile regime so greater downside and choppy action is the norm. Plus, our weekly Nervous & Numb indicator triggered a sell signal last week (red shading). This indicator measures the relative moves between the market and the VIX. This indicator also portends greater volatility and tends to have a long lead on larger tops. 

4. Trend Fragility continues to hover around the 80% level. This is high but not the 90% required for a major sell signal (though we don’t always get one before a big top). 

My general read is that the market is in the early stages of putting in a broader top. But I expect this to play out over the next few weeks, with an increase in volatility and the market at least revisiting recent highs or more likely, making new ones. 

5. I’ve been writing about the bearish bond backdrop for the past month, where things have played out close to expectations. But the Narrative Pendulum has swung far over the past couple of months, moving from recession imminent to no landing / higher for longer.

And I’m of the belief that bonds are putting in a larger bottom, though I’d ideally like to see a bear trap below recent support (horizontal line below). 

6. Our yield leads aren’t saying much at the moment as they’re mostly inline with yields. I’d expect we’ll see these begin to negatively diverge (signaling lower yields) sometime over the next month. 

7. Spec positioning is crowded to the short side in 2s, 5s, and the DXY. I expect there will be some great longs here going into the Fall. 

8. Last week I pointed out the large bear trap on the monthly chart of EURUSD. Not only are the long-term technicals looking weak but speculators are crowded long (+90% for large and small specs) while its yield spread oscillator is trending lower. 

9. If we get a move back up to this red zone followed by a daily reversal, I’d look to get short. 

10. Here’s a heatmap of returns and market regimes for US markets and sectors. Energy continues to show the most robust strength and momentum across multiple timeframes.

11. And despite the large move we’ve seen in energy stocks over the past two years, they’re still incredibly cheap on an absolute and relative value basis (chart via BofA). 

12. One services company I’m looking at is ACDC HQ here in Texas. The stock trades at a forward PE 4x and seems to have a hard price floor at the $11 level (chart is a monthly). 

No strong feelings on the name yet as I’m just starting to give it a look. Let me know if you have an opinion on it. 

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.

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.