Nervous versus Numb…

I used to think it was all stock picking. Truth is, risk management is half the battle. Portfolio management is like poker, you don’t always get perfect cards and you need to manage your stack. My risk management is broken down between rules I never break and principles that reinforce good habits… Imagination is the skill. Uncertainty is the opportunity. Data is important but so is the story. Patience is way underrated.”  ~ Phillipe Laffont via this great thread by @InvestiAnalyst

Good morning!  In this week’s Dirty Dozen [CHART PACK] we look at the dive in Bitcoin, the oversold conditions in the SPX contrasted with the deteriorating margin projections, secular labor vs capital trends, market returns in tightening cycles, EURUSD nearing a bottom, and we finally end with a metals-alloy producer ready to resume its run, plus more… 

***click charts to enlarge*** 

1. There was quite a bit of action in crypto over the weekend with BTCUSD falling over 20% at one point on Saturday. Despite the selloff, BTC was able to reverse most of the fall, creating a large lower tail. 

This shows that bulls are still willing to step into the breach. Now, a lot of stops have been run and some leveraged players cleaned out. We should see a bounce this week. But a failure to hold the current level would be bad juju. 

 

2. BTCUSD has now put in 3 consecutive weekly Bear bars. This is surprisingly rare. There have only been 5 other occurrences. All led to further downside in the ensuing weeks. With that said, 5 occurrences is a small sample size, so make of this what you will. 

 

3. From October to November the market put in a very strong run. That’s easily visible in the string of consecutive bull bars on the chart below. It’s since put in a double top and now a potential double bottom on the daily. Typically, the first move down after a strong run like the one we’ve seen in Oct/Nov gets bought. 

 

4. The major indices don’t properly reflect the carnage that’s been going on underneath the surface over the last two months. A large section of this market has been taken out behind Uncle Tony’s sub shop and ruthlessly kneecapped. 

The % or Russell 3000 stocks trading below their 50-days fell below 25% last week. Oversold breadth conditions around this level tend to mark bottoms in healthy uptrends. 

Our working assumption is that we’re in the process of rolling over a larger selloff. But, as always, we’ll be keeping our opinions weakly held. 

 

5. Here’s our Nervous and Numb indicator which measures the technicals of the SPX and VIX independently and in relation to one another. The daily (right chart) dipped into numb territory on Friday, triggering a Buy Signal suggesting we’ll see a bounce this week. The weekly triggered a Sell Signal, indicating a high probability this move lower is just starting… 

 

6. Here’s one for the bulls though… Credit has briefly turned up after leading stocks a good bit on the way down. Keep an eye on this in the days ahead. 

 

7. @MrBlonde_macro put out a good short piece the other day (here’s the link). Here’s a variant of an NDR chart he put together. It shows the SPX’s average performance around various tightening cycles. If inflation stays elevated then this cycle could certainly become one of the “Fast Cycles” (orange line). 

 

8. Estimated aggregate SPX profit margins look to have may have peaked... 

 

9. Morgan Stanley published a report last week titled “What the ‘Workers Economy’ Means for Margins and Markets”. They make the case that we’re in the midst of a reversal in the secular trend of income distribution between workers and capital. I agree with most of their takeaways and think this is an important trend to be tracking. 

 

10. Cameron Crise of BBG’s “Macro Man” shared this chart and tidbit over the weekend. Cameron writes with emphasis by me “Even prior to the emergence of omicron, the expected earnings backdrop has been looking less favorable. Currently, analysts forecast EPS growth of 7.7% next year. While such an outcome wouldn’t necessarily be anything to sniff at, and those estimates are obviously subject to revisions, this is still one of the lowest expected growth rates of the past three decades. The last time it was this low was the end of 2014, which didn’t exactly precede an ebullient period for equity markets.” 

 

11. EURUSD hit the measured move target we gave back in October. It’s now oversold, unloved, and the fundamental backdrop is improving. Commercials hold their largest long position (on a 3yr adjust OI basis) since early 17’. Conversely, small specs (blue line) are crowding into shorts. 

At the same time, our yield oscillator shows the rate spread is picking up in favor of a stronger euro. It may chop sideways for a bit and probe the lows one more time for a double bottom. But I think EURUSD will be setting up for a buy in the coming weeks. 

  

12. Here’s a company I’ve been digging into lately and so far really like what I see. The company produces silicon-based metal alloys, electrodes, ferrosilicon, and manganese alloys, amongst a few other things. 

The stock ran as much as 3000+% off its 2020 COVID lows. I remember first giving it a quick look back in Nov 20’ when it was trading for $0.70 cents and thought it was worth a dig. But before I could dive in, it started to run and I moved on to other things thinking I’d missed the move *facepalm emoji*. 

Anyways, this one has the trifecta of macro, fundamental, and technical tailwinds behind it. I’ll be putting out a report to the Collective with my findings later this week. 

 Thanks for reading. Stay safe out there and keep your head on a swivel.