Will The Bulls Show?

The essence of risk management lies in maximizing the areas where we have some control over the outcome while minimizing the areas where we have absolutely no control over the outcome and the linkage between effect and cause is hidden from us. ~ Petere L. Bernstein, “Against The Gods”

Good morning!  In this week’s Dirty Dozen [CHART PACK] we look at short-term oversold conditions in the SPX and what that means on a walk forward basis. We then look at troubling credit technicals, some COVID charts, historical divergences in Europe, rate hike pricing, a call for 150/bbl oil, and a LatAm E&P, plus more… 

***click charts to enlarge*** 

  1. The market hit extreme short-term oversold levels last Friday. It’s in a Bull Quiet regime and therefore the onus remains on the bears to prove that this dip won’t get bought. 

 

  1. Here’s the three week forward returns for every past instance over the last 20-years. The market shows a strong bullish bias (as expected). This is doubly true when you add the filter of a Bull Quiet SQN regime. 

 

  1. But, as I’ve been writing for the last two weeks. Trend Fragility is extremely high at the moment. This means anything can happen… so, we need to stay on our toes and wait for price to tell us what’s what. 

The RoC in BAA Yields is one of the many inputs that’s adding to this increased trend fragility. It’s risen to levels that have coincided with extended periods of market volatility. 

 

  1. I wrote last Monday how the COVID winter wave narrative was about to hit fragile markets. That happened sooner than expected with the recent concerns over the new Omnicron strain. It’s still too early to speculate on what impact the new strain will have but regardless it looks like we’re starting another substantial winter wave. 

 

  1. Trevor Bedford, a mathematical epidemiologist posted this thread on twitter the other day where he lay’s out some of the unique characteristics of Omnicron versus the other variants. The below chart shows the substantially higher number of mutations to the S1 domain of the spike protein versus the other known strains. If you don’t understand what any of that means, you’re not alone… 

 

  1. I’ve shared versions of this chart over the last few months. Nonetheless, the extreme in US relative equity performance continues… Not sure how much longer this can continue but something to keep in mind because when this core vs periphery cycle flips, it’s going to have massive implications for the US dollar and everything else. 

 

  1. Over the weekend I started seeing a narrative begin to become popularized essentially saying that this winter wave and the Omnicron news were bullish markets as it would turn the Fed more dovish. Call me skeptical but I think that ship has sailed. 

The Fed is now concerned about inflation not being so transitory. This raises the hurdle considerably for a switch back to more dovish intents. Going to take a lot more pain for that to happen.  

 

  1. Here’s the latest dots, market, and economist projections for rates, via Nomura. 

 

  1. The USDMXN has completed a rare compound fulcrum bottom. The measured move target on this one is 23.580. The chart below is a weekly. We are long.

 

  1. Convexity Vortex shared this snapshot from Kolanovic and team calling for $150/bbl on the horizon, which I think is plausible considering the supply/demand backdrop.

 

  1. He also shared this great chart showing the breakdown in rig count between public and private players. We can clearly see the impact of ESG and the public market’s unwillingness to invest in production. Probably a good time to fund a private player in the Permian… 

 

  1. I pitched this LatAm E&P back in May. The stock has gone on a nice run of 125%+ since but it’s still very early days for this name. If you’re looking for entry points, this week is a nice setup for a low risk entry with a stop not too far below Friday’s low. 

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

Alex Barrow

Founder & MO Team Lead, CIO at Foundation Capital, macro junky, former Intelligence professional at FBI, DIA, and DOD, USMC Scout Sniper turned yogi/meditator.

https://x.com/MacroOps
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