A Stampede Out Of Europe [Dirty Dozen]

“Markets tend to move in fits and starts, adopting a thesis and then abandoning it. We try to catch them if we can, but if we can’t, we are better off not trying… I am particularly keen on investment theses that the market is reluctant to accept. These are usually the strongest” ~ George Soros

Good morning!  

In this week’s Dirty Dozen [CHART PACK]  we look at signs of capitulation in EU and EM equities, but not quite in the US. We covert 3-wave Push Bottoms in tech, the argument for a steeper Fed rate path, China’s zero-Covid conundrum, and major compression in BTCUSD, plus more…

  1. BofA’s latest Flow Show summary notes the capitulatory action in emerging markets recently, with the largest outflows since the COVID Mar 20’ bottom. As well as the largest outflows ever from European equities

Now we just need some capitulation in the US to give us a durable bottom.


  1. BofA’s Bull & Bear indicator shows we’re getting close, though not quite there yet. 


  1. Those record-breaking flows out of Europe helped drive the percentage of stocks trading above their 50-day moving averages to sub -5% last week.


  1. While broad-based oversold conditions like this typically lead to short-term positive reversion, it’s a mixed bag looking out further than just a few days. The graph below shows the historical returns over the following 25 trading days.


  1. Some food for thought…


  1. This is an important point to keep in your backpocket via BofAML:

“Exhibit 8 compares the Fed funds rate (including our forecasts) to historical forward pricing of the policy path. It shows that markets underpriced Fed hikes at the start of the previous two hiking cycles. In our view, this is because ex-ante market pricing is a weighted average of several scenarios, including some low-probability negative ones. When those scenarios do not play out, market pricing looks too low after the fact.”


  1. And this: 

“Our machine learning-based US business cycle indicator also points to more and faster rate hikes than in 2015-19. The indicator classifies monthly data from the beginning of the Great Moderation (January 1985) into four regimes. It has been in the strongest “boom” regime for 19 of the 20 months from June 2020 to January 2022. 

“By contrast, it was in this regime for just six of the 128 months in the previous cycle. It spent most of that cycle in the “soft patch” regime. Our takeaway is that the last business cycle expansion is the wrong history lesson for Fed watchers. The current expansion looks a lot more like the latter stages of the 2002- 07 cycle.”


  1. Here are two important charts from SentimenTrader (1) shows the Smart-Dumb Confidence spread is high, which historically leads to positive returns over the following months (look at those win rates) and (2) tech stocks [XLK] are entering a period of extremely favorable seasonality.


  1. China is finding it difficult to exit from its zero-Covid policy. Confirmed cases are spiking to their highest numbers in two years. Latest count has roughly 17m Chinese back under lockdown.

Chinese vaccines have proven to be rather ineffective. Their mRNA vaccines under development, won’t hit the market for at least a few months, at the earliest. The success of their COVID zero policy means their herd immunity is low. Watch this story closely as it could have big implications for crowded, overbought, commodities.


  1. A look at oversold tech via @MacroCharts.


  1. BTCUSD is in a major compression regime right now. Compression regimes lead to big trends, as I pointed out back in July 20’ (link here) before BTC’s last big bull trend kickd off. 

I’m directionally agnostic (slightly biased bullish though) and willing to play a break, up or down.


  1. Donate, pray, write/call your political leaders, etc… Make sure to do your part to support the people of Ukraine and their right to exist as a nation and the freedom to choose their own path. 

Thanks for reading.

Stay frosty and keep your head on a swivel.

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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.


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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.

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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.

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