A Trend Too Far…

Being so critical, I am often considered a contrarian. But I am very cautious about going against the herd; I am liable to be trampled on… Most of the time I am a trend follower, but all the time I am aware that I am a member of the herd and I am on the lookout for inflection points… I watch out for telltale signs that a trend may be exhausted. Then I disengage from the herd and look for a different thesis. Or, if I think the trend has been carried to excess, I may probe going against it. ~ George Soros

Good morning!  

In this week’s Dirty Dozen [CHART PACK] we take a pointer from the Palindrome and walk through the current state of this market trend. We discuss what the technicals are saying (higher over the short-term), what the herd is doing (running full-bore ahead), look for the inflections (this trend is nearing exhaustion), and then check out some stocks breaking out that aren’t trading for 20x sales, plus more… 


***click charts to enlarge*** 

  1. The market is in a Buy Climax. Buy Climaxes tend to last longer than most expect. The next measured move target for the SPX is the 4,800 level, which is the distance from its recent monthly i-o-o breakout pattern. Since the big round 5k number isn’t much further, there’s a good chance the market guns for it before it finally rolls over into an extended corrective phase. 


  1. The underlying data suggests we’ve entered the 9th inning of this trend and should see an intermediate top put in within the next 2-months. Aggregate US Exchange Fund Flows recently hit their 100th percentile. FOMO that comes this late in a trend creates the instability that’s a necessary for a major top. 


  1. And while everyone is piling in, our measures of long-term breadth continue to deteriorate. This is another precursor to larger corrections.


  1. Aggregate US exchange new 52-week lows jumped last week to their highest level since the COVID bear. Another sign of a tired trend… 


  1. One precondition for a larger top that hasn’t yet triggered is to see price make a 2stdev jump up (green line). A move to the 4,800-5k level would do the trick though.


  1. Our Trend Fragility indicator from our HUD (internal dashboard for Collective members) hit the 100th percentile last week. One of its inputs is HF positioning, which is at its highest level since Sep 2018, but still below the threshold that typically precedes larger corrections.


  1. But there’s a pretty good chance these guys start chasing into year’s end. GS pointed out in a recent note that “The most popular hedge fund long positions have suffered a record stretch of underperformance this year.”


  1. What’s interesting is that they’re crowding into the most expensive issues… From GS again, “Surprisingly, while hedge funds rotated long portfolios toward Value during 3Q, they also lifted the weight of high-multiple growth stocks to a new record.” 


  1. We’re running into the end of the year with stretched technicals, silly sentiment, crowded positioning, deteriorating breadth, a rising dollar, widening credit spreads, and a Fed that’s being forced to turn more hawkish… Oh, and we also have another COVID winter wave on the way, with lockdowns starting again in Europe. Right… 


  1. All of the above sets up a perfect backdrop for precious metals. Gold has broken out from its 6-month triangle. Positioning is low, sentiment is bearish/uninterested, and the technicals are *chef’s kiss*. We’ll be adding to our position this week. Here’s our framework for analyzing PMs, for those of you who are interested.


  1. Most of the big chinese tech companies appear to be racing each other to zero, except one, JD.com (JD). Below is a monthly chart. It’s been a while (2-years+) since I last gave it a proper shake, but you can do worse than buying a chart showing this much relative strength in a hated market. 


  1. Telefonica Brasil (VIV) is Brazil’s largest telco operator. This is a dominant business in a growing market, with a solid balance sheet, that’s trading for low single digit multiples to FCF. The HF managers rushing to buy 20x revenue stocks, certainly won’t appreciate this one. But, for those of you less polished investors like myself, VIV might be worth a look. It’s making a move to breakout from its 7-month base. Here’s our writeup on VIV from earlier this year.

Thanks for reading.

Stay safe out there 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.


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.