Most modern efficiencies are deferred punishment. ~ Nassim Taleb
Summary: Conflicting market signals suggest we’re near a significant inflection point. This means it’s key to be on your toes and stay nimble. Equity weakness is being driven by the rise in rates (10yr yield + 2std overbought). Stocks need bonds to find a floor. Bonds may need stocks to punch below theirs first for that to occur. Current low confidence base case is a swift drop in stocks leads to bottom in bonds and a v-shaped recovery in stocks. USDCAD setting up for another buy signal, and the gold bull hasn’t even really begun.
The MO portfolio officially closed things out with a +50.4% return on the year. The team and I will be publishing our eoy review soon, where we’ll dive into our painful mistakes and total blunders, as well as the things we’ve learned and what we’ll try to do better in the year ahead. So keep an eye out for that. And if you’d like to join our Collective as we tackle 2025 head on, just click here.
Alright, let’s get to it.
1. The Qs are dancing on the lower bound of their monthly range and look like they’ll break below it.
2. For the past few weeks, we’ve pointed out the weak measures of breadth, indicating a growing risk to the trend. One way we like to look at breadth is their divergence from price. Below is the McClellan Summation Divergence index. It’s dropped to levels that tend to either precede larger selloffs or mark significant bottoms. Helpful, I know… but the point is that the market is at a significant technical inflection point where a larger move is likely setting up.
3. The key driver behind the weakness in equities is tightening liquidity, primarily from the rise in yields. The chart below shows the zscore of the 10yr yield just crossed the +2std level. If yields don’t strongly reverse soon, then expect the chop and vol in stocks to continue.
4. To add to the growing list of divergent signals, here’s one for the bulls showing our Internals Aggregator nearing a major buy signal. Recall that last week, I shared that our N&N indicator also just triggered a significant buy signal. Perhaps we see a violent dip that puts the floor on bonds, leading to an equity rip? Just more reason for us to stay nimble and wait for the weight of evidence to tip in one direction or the other.
5. BofA on when the SPX is up > 20% past two years…
6. My current sentiment read: Long-term sentiment & positioning crowded bullish (though NYSE margin still has room to rise before a cyclical top is in). Intermediate term it’s neutral to bearish, as shown here in BofA’s Bull & Bear setup. And short-term it’s still crowded on the bull side, meaning trend fragility is high until we see more of a washout.
7. Here’s something to look forward to. Breadth is nearing the so bad, it’s good levels with the % of members trading above their 50dma now below 20%. Sub-10 % tends to mark significant bottoms.
8. French equities up, copper up, crude up… Is the market sniffing out some soon-to-be-announced Chinese fiscal stimulus?
9. We’ve been bullish DXY and long USDCAD for the past few months. We took half profits the other week, but will reload and raise stops on a bullish breakout from its current squeeze.
10. The CAD trade is being driven by bearish CADUSD yield spread momentum.
11. BBG’s Simon White wrote a good piece the other week about gold and the “Global Fiscal Put.”
12. We’ve been gold bulls for the past two years and continue to hold a sizable long position. We believe that the real bull market hasn’t even started yet. This cycle is anomalous, driven primarily by foreign central bank buying. Retail isn’t yet participating in any meaningful way. The real gold bull will kick off after US stocks enter a cyclical bear market and the USD peaks and turns.
If you’d like to join the Collective, our premier service that offers discussions on high-level theory and performance, differentiated research, real-time trade alerts, portfolio tracking, and a global community of serious traders/investors dedicated to mastery, then click the below and sign up. We look forward to seeing you in our Slack!
Thanks for reading.
