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. 

 

2. 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. 

 

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

 

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

 

5. 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.

 

6. 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.

 

7. 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.”

 

8. 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.” 

 

9. 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… 

 

10. 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.

 

11. 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. 

 

12. 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.