There are in fact four very significant stumbling blocks in the way of grasping the truth… namely, the example of weak and unworthy authority, longstanding custom, the feeling of the ignorant crowd, and the hiding of our own ignorance while making a display of our apparent knowledge. ~ Roger Bacon

Good morning and a Happy Veterans Day to those of you serving and who have served!

In this week’s Dirty Dozen [CHART PACK] we look at signs of a global rebound in growth, green shoots in Europe, trouble ahead for US bonds, check-in on the four drivers of gold, and check out oil extraction costs in different parts of the world, plus more…

1. It seems like just yesterday *checks notes: it was yesterday* that the bears were pointing to falling semiconductor demand as incontrovertible proof that we were in a recession. Looks like they forgot to send that memo to the semi index which has been on a complete tear and is now implying a strong reversal in the ISM over the coming months (chart via BofAML, h/t @carlquitanilla).

2. Speaking of ISM, this chart from Citi shows that momentum (the 3m chg in 3mma) in global manufacturing PMIs has stabilized and is even turning up in some regions.

3. Another positive development is that we’re seeing real money growth (real M1 YY%) pick up in Europe as shown below in the chart from Citi. This matters because growth in the money stock typically precedes growth in the underlying economy, hence the strong and often leading correlation between the two.

4. There’s a host of other data points pointing to at least an intermediate bottom in Europe. German orders-to-inventories ratio is turning up along with Ifo Manufacturing Expectations (charts from Citi). And here’s a bonus chart of German New Orders putting in its first positive print on a YY% basis in a while, which more often than not leads Industrial Production.

5. A rebound in European growth would be notable for a number of reasons. One of these being that negative bound European interest rates have acted as an anchor on US yields, pulling them lower as capital was forced into US bonds to seek a return. German Bund yields bottomed in September and have been steadily rising since. A pickup in growth would accelerate this trend which in turn would lead to a selloff in US bonds (rise in yields). Chart below is a weekly of US T-Bond futures.

6. JPMorgan’s recent UST client survey shows that there’s plenty of long positioning to unwind.

7. A selloff in bonds (rise in yields) would be very bad for gold since the real (inflation-adjusted) interest rate is the primary driver of the price of gold over time (falling real rates is bullish gold and vice-versa). Rising real rates will be coming at a time when gold is working off a speculation frenzy shown by historically high open interest, net spec positioning, and sentiment (via Consensus Inc.)

8. Look for gold to pullback to the $1,400 level near its 200-day moving average (blue line). This will set up another major buying opportunity in the yellow metal.

9. Rising US rates combined with a recent strong bounce from the US dollar off its 200-day moving average may prove to be a momentary headwind to emerging markets. The below chart is a weekly of the IShares MSCI Emerging Market ETF (EEM). It looks to be putting in a temporary reversal after being rejected by its upper weekly Bollinger Band.

10. Something to keep in an eye on is the speed at which yields rise over the coming weeks. Luckily for stocks, the rate-of-change in BAA yields is turning up from an extremely depressed level but if it continues rising at this pace it’ll soon begin to exert pressure on equities.

11. We are seeing increasing signs of extremes in short-term sentiment and positioning as investors rush to gain exposure to the breakout in stocks. But this is coming off the backdrop of longer-term indicators showing extreme bearishness. When in bull trends, like the one we just started, it’s important to not overreact to every sign of overbought/overoptimism. We want to focus on exploiting the broader trend higher and not allow ourselves to get shaken out along the way by focusing on the minutiae. Put another way, short-term extremes in sentiment and positioning will eventually lead to a correction but you’re better off buying the correction than selling the reversal until the bigger picture says otherwise.

12. And finally, here’s a great chart showing the post-tax breakevens for new oil projects from around the world via the Saudi Aramco prospectus (h/t @acosgrove003).

There are really four kinds of trades or bets: good bets, bad bets, winning bets, and losing bets. Most people think that a losing trade was a bad bet. That is absolutely wrong. You can lose money even on a good bet. If the odds on a bet are 50/50 and the payoff is $2 versus a $1 risk, that is a good bet even if you lose. The important point is that if you do enough of those trades or bets, eventually you have to come out ahead.  ~ Larry Hite

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at breakouts, breadth, and credit confirmations that are ALL signaling a move higher in global risk assets. Also, we look at positioning amongst inflation assets and see where the pain points in the US dollar are amongst CTAs. Plus more…

1. Markets are breaking out to the upside everywhere. The S&P 500 Value Index is one of them. It made a new all-time high last week. According to Sentiment Trader, when the index “broke out to a new all-time high for the first time in 200+ days, the S&P 500 Value Index always went higher 6 months later”.

2. When trying to gauge the strength of the underlying market trend, it’s key to pay attention to what’s going on under the hood in the individual issues. Breadth will nearly always precede major changes to the trend. This chart from @MacroCharts shows that breadth in the S&P is at its best level in over a year.

3. I’m seeing similar indications of strength in nearly all my breadth and momentum indicators. Take the NYSE AD-line for example. It just made a new cycle high last week.

4. And this strength isn’t just isolated to the equity market. Just as importantly, it’s showing up in credit as well. This past week we saw credit’s relative performance break out to new 18-month highs. This is exactly the type of action you want to see before a major move higher in stocks.

5. Our “Leaders” are all doing what they’re supposed to be doing; moving up and to the right. Notice how the news and fintwit bears were all whining about Texas Instruments (TXN) earnings miss and lower guidance? Yet, the semis index (SMH) made new all-time highs last week (chart below is a weekly). Check your bias.

6. Another thing to keep an eye on is cyclical vs defensive relative performance. Financials and industrials are on the verge of breaking out and the copper/gold ratio looks like it’s about to do the same. Another rate cut from the Fed this week (something which is looking likely) will steepen the curve and drive a bullish thrust in relative cyclical/defensive performance.

7. I know I’ve been hammering this point over and over the last couple of months but sentiment and positioning remain in stark contrast to markets that are hitting new highs. The NAAIM Average Stock Exposure Index is at 65%, well below its 3yr and 5yr averages.

8. And Nomura’s Global Equity Sentiment Index is back in negative territory. Apparently, no one is impressed with the across the board breakouts that are happening. This is exactly the type of sentiment we want to see for the next leg higher.

9. We’re at a critical level for the US dollar. It’s still well within a technical uptrend and above its 200-day moving average. But as this chart from Nomura shows, if it moves any lower from here it will trigger selling from CTAs which could spark a positive feedback loop of a lower USD and more forced selling. The FOMC this week will be key to where the USD trades in the weeks to come.

10. And CTA’s are positioned fairly long the dollar against a number of pairs (chart via Nomura).

11. If we do see the dollar trade lower from here it’ll be a nice and needed tailwind for crude where hedge fund short positioning has become increasingly crowded on the short side (chart via @Warrenpies & h/t @TN).

12. We’ll end with another great chart from @MacroCharts that serves as a perfect reflection of the current positioning/sentiment zeitgeist. Citi’s Long/Short Inflation Ratio is at levels that have marked the absolute lows in long/short inflation positioning two other times this cycle. Stocks are breaking out on the back of strong breadth while bonds are looking precarious and the Fed is likely to cut right at the moment when the global manufacturing recession has troughed. Position accordingly.

The point of forecasting is not to attempt illusory certainty, but to identify the full range of possible outcomes. ~ Paul Saffo

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at more charts showing the pervasive bearishness amongst investors; from sentiment near multi-decade lows to persistent outflows in EM stocks. We also check out seasonality, some gold charts and more. Here we go…

1. Credit Suisse’s Global Risk Appetite is at depressed levels showing investors around the world have grown increasingly bearish.

2. Individual Investors in the US aren’t immune to the negativity. AAII %Bulls is near 30-year lows.

3. The 50-day moving average of the Total Put/Call ratio is close to 2 Stdev above its 12-month rolling average. This means investors have been persistently buying downside protection at a high rate. Similar trends in the past have tended to mark major bottoms.

4. Investors across the board (from retail to institutions) have been net sellers of EM stocks since the start of the year (chart via MS).

5. The chart below from Morgan Stanley shows how consistent these outflows have been week after week.

6. The graph below shows GEM Fund Manager weighting relative to the MSCI EM Index (via MS).

7. @MacroCharts recently shared this great chart showing the FX-adjusted US flows into Chinese equities. The outflows are at extremes. I agree with his thinking below. Many EM charts have built a nice coiled base. Weak hands look like they’ve all been washed out. It’s not going to take much in the way of “positive surprises” to reverse these flows.

8. Tom McClellan noted in a recent blog post (link here) how the equity market’s seasonal have been shifting forward in recent years.

9. If stocks start getting bid and we enter a new period of risk-on then bonds and gold should continue their recent bouts of weakness. Expect gold to continue to retrace and consolidate for a while.

10. It’s probably going to take a few weeks if not a couple of months to work off the sentiment and FOMO buying that chased into this rally over the last few months. The chart below shows CFTC open interest (for futures only) spiking to all-time highs. We can see that similar spikes in speculation in the past have preceded extended retracements.

11. Another data point showing extremely bearish positioning. Spec longs in the S&P are near levels that have marked major bottoms in the past. I hope you’re seeing the pattern here…

12. We’re going to need to see the ISM bottom soon (I think it will) or else the odds increase that we’re on the cusp of an earnings recession. The chart below shows the ISM Manufacturing Index and TTM EPS for the SPX.

We kick off our series of imagining alternate scenarios and evaluating the weight of the evidence by starting with the most important thing, the tape.

I’m going to walk you through my process for looking under the hood at the broader supply and demand forces driving underlying price-action in the averages and what the technicals are saying right now (hint: It’s odds on we’ve started what should be a decent-sized corrective impulse).

Before I get into I want to let everyone know that our flagship macro product, The Macro Ops Collective, has officially started Fall enrollment!

Collective members receive macro analysis like this each and every week. So if you want to step up your game and get serious about markets into the end of the year I suggest taking a look at the MO Collective! 

Now back to markets…. 

Here’s the basic framework we’re going to go through:

• • Technicals
    • Major Market Indices
    • Leading Cyclicals
    • The Generals
  • Internals
    • Momentum
    • Participation and Breadth
    • Cyclical vs. Defensives
    • Credit and Spreads
  • Sentiment (Collective Members Only)
    • Short-term Positioning and Sentiment
    • Long-term Positioning and Sentiment
    • News Cycle and Popular Narratives

Like a thermometer

Charts reflect the collective voice of the entire marketplace. Most of the time the market is pretty good at discounting an unknowable future. But, sometimes, reflexivity kicks in and the pendulum swings too far in one direction or the other. These swings are fairly easy to identify because they only occur when a near consensus surrounding a popular narrative has been reached (ie, sentiment is running really hot or freezing cold).

To quote Bruce Kovner again, “technical analysis is like a thermometer. Fundamentalists who say they are not going to pay any attention to the charts are like a doctor who says he’s not going to take a patient’s temperature. But, of course, that would be sheer folly. If you are a responsible participant in the market, you always want to know where the market is — whether it is hot and excitable, or cold and stagnant. You want to know everything you can about the market to give you an edge.”

By just taking a step back and looking at the long-term trends in the major global indices we can get a feel for where the supply and demand trends have been and where they may be headed. Remember, momentum is a powerful force in markets and established trends tend to persist until they hit local extremes, usually noted by buying/selling climaxes and accompanied by a consensus narrative.

Most global indices have been in or were recently in an extended bear market — as marked by consecutive lower highs and lower lows — with the US being the sole exception.

The US NYSE has been moving sideways since Jan of 18’. Asia ex-Japan and Europe peaked around the same time and have been trending lower for 12-21 months depending on whether you count the year-to-date bounce as the start of a new trend or a corrective bounce.

Within the US we have a mixed bag. The SPX and Nasdaq have been in a high volatility low angle uptrend and small-caps peaked 14-months ago and have yet to make a concerted advance towards new highs.

Next, we want to look at our leading cyclicals.

The market is a discounting mechanism and peaks on average 6-9 months before a recession hits. Within the market, there are leading cyclicals that tend to peak even earlier. These are areas of the market that track things such as financials, consumer spending, construction etc… they are representative of business activity within the broader economy.

We don’t need to get fancy here. Just look to see where the 200-day moving average (blue line is trending). The following are all 5-year charts.

Financials have traded sideways for 21-months.

Housing declined for all of 18’ but has since been moving steadily higher.

Autos have been trading sideways for a while.

Like housing, construction materials trended lower for all of 18’ but have been steadily rising since.

Flooring traded lower for all of 18’  and has chopped sideways year-to-date.

Construction materials trended lower for all of 18’ but have been in an uptrend ytd.

Home improvement has been in a solid uptrend ytd.

Auto parts have been trending lower for 18-months.

Semis are in a broader uptrend.

Outside of the auto sector, the majority of our leading cyclicals are for the most part positive — they are trending up and to the right.

Lastly, we have our Generals. The Generals are the stocks that capture the zeitgeist of the cycle. They’re the popular cycle outperformers. When this group begins to falter we want to take stock.

This Generals index has all the FAANMG stocks as well as some other large high-flying SAAS companies and JPM for good measure. Our Generals have been trading sideways for the better part of this year and the basket looks susceptible to at least a short-term selloff below its 200-day MA (red line). On an individual basis, there’s some increasing technical weakness in these names.

To summarize the technicals picture, we have:

• • Market Indices
    • The majority of global markets have been in an extended bear market that began on Jan 18’
    • The US, for the most part, has traded sideways for the last 21-months, with large caps in a low angle volatile uptrend and small-caps in a slight downtrend for the last 14-months
  • Leading Cyclicals
    • Housing and construction sectors are in a broad uptrend following a year-long downtrend in 18’
    • Autos are weak across the board
    • Semis are trending up and to the right
  • The Generals
    • Been trading sideways for much of the year and look susceptible to short-term weakness

Stay with me, we’re building a picture.

The strength of the line

Next up we have our market internals. Internals give us an under-the-hood look at where the capital is flowing into and out of which provides us with a sense of the strength or lack thereof, of the trend.

We start first with momentum, for which we use just a simple MACD oscillator. Currently, the SPX is working off both a weekly and daily MACD sell signal and downside momentum is accelerating.

For momentum to endure you need to have a strong line. Think of the stock market averages as a medieval battle unit, standing shoulder to shoulder as they march headlong into the enemy lines. The greater their depth of advancing soldiers the stronger their front lines are and the easier it is for them to advance. Conversely, when these lines thin out and there are fewer and fewer soldiers pushing forward, the easier it is for the line to break and momentum to reverse.

There are many ways to gauge the strength of the market’s line and one of these is the NYSE Advance/Decline line (stocks only). As long as the AD line and market are moving higher in gear with each other, there’s little to worry about; it’s unlikely the market will suffer a significant correction.

However, when this indicator diverges from the market for a significant period, it’s time to become cautious. A negative divergence that lasts a couple of weeks is likely to be only a minor correction. A major divergence that lasts a few months means a bear is waking from its slumber.

You can see the multi-month divergence that appeared in early 07’ preceding the nasty bear market.

The AD line made a new high just last month and has since been moving lower in lockstep with the market. The lack of an extended negative divergence — a weakening of the line — suggests that it’s highly unlikely we’re putting in a market top right now.

For more intermediate and short-term measures of market breadth, my go-to’s are the McClellan indicators (both summation and oscillator). For a detailed explanation of how these indicators are constructed, go here. But, put simply, the McClellan Oscillator is just another way of looking at the number of advancing and declining issues in the market whereas the Summation index is just a running total (summation) of the Oscillator.

Generally speaking, when the Oscillator and Summation indicators are positive, it signals that money is flowing into the market and vice-versa when they’re both negative. And when the two hit local extremes it can indicate a reversal point.

Both triggered sell signals within the last two weeks and are not yet showing signs of a reversal in the near-term.

Credit spreads are widening and cyclical vs. defensive groups have been trending lower. Both are indicating that we’re likely to see a continuation of short-term weakness in the weeks ahead.

Market internals summary:

• • Momentum
    • A weekly and daily MACD sell signal are still in effect which means we should be biased to the downside until these flip
  • Participation and Breadth
    • The NYSE AD line made a cycle high last month and has been moving in lockstep with the market. There is no major divergence thus it’s highly unlikely we’re putting in a major top
    • The McClellan indicators have not reversed the sell signals they triggered two weeks ago. Keep a downside bias
  • Internals
    • Credit is leading the way lower. Keep an eye on LQD/IEF and high-yield (JNK). Both look like they’re about to crack. Falling oil prices raise the potential for a selloff in credit like the one we saw at the end of last year
    • Cyclical vs. Defensives have been unable to get off the floor, largely due to the relative strength of defensives. We want to see this trend reverse if we’re going to start a sustainable impulse higher

Playing the player: no consensus

One of our key operating guidelines is that the market is going to move in a way that frustrates the majority of people, the majority of the time.

This is why it’s important we’re constantly gauging public sentiment and the average positioning of the market. When we can identify key consensus points we can wait for technical confirmation and then fade the masses.

We look at a host of sentiment and positioning indicators. Some are good for the short-term and some for the longer-term.

I sent out our full sentiment report to Macro Ops Collective members this morning. If you’re interested in the current state of market positioning check out the Collective! 

Let’s start with a few of my favorite short-term ones.

Conclusion:

Combining technicals, internals, and sentiment together we get a more detailed picture of what’s going on in markets.

We can sum things up as this: Markets globally ex. US peaked nearly 2-years ago and have been mostly trading lower or sideways since. In the US, markets have largely gone sideways for the last 21-months; with large-caps slightly up and small caps down a good deal.

Outside of autos, the leading cyclical sectors are trending up and to the right, following a 12-month long beat down in 18’.

This cycle’s Generals have traded sideways for the better part of this year and look susceptible to some short-term weakness. But, they remain in a broader uptrend.

Momentum is indicating short-term weakness ahead but the broader breadth and participation of the market remains strong, which means it’s low odds that we’re in the process of putting in a cyclical top.

The credit market looks like it’s about to have a conniption. This should exacerbate short-term weakness in the stock market. But longer-term, credit spreads remain fairly tight and funding pressures are low.

Sentiment and positioning indicators show that, for the most part, the market is becoming increasingly bearish. The II is the one stubborn survey, this should get washed out following further downside.

Ultimately, the broader technical picture says that we’re likely to continue in our current volatile sideways range until we hit a local extreme in sentiment. Furthermore, the weight of the evidence suggests that this is likely a consolidation period that will lead to another impulse higher. The technicals, internals, and sentiment pictures do not yet support the argument that we’re putting in a long-term top. Though they do suggest that it’s high odds we see an acceleration in this down move over the coming weeks.

The next two weeks are some of the most volatile weeks of the year on a seasonal basis. Over the last 20-years, the S&P has tended to sell-off into the end of the month (26th is the average bottom) before rocketing higher. I expect we may see a similar pattern this time around.

If you would like to see exactly how we’re positioning for this volatility check out the Macro Ops Collective before this Sunday!

In our follow-up piece, we’ll dissect the economic numbers. See where the strength and weaknesses are in the global economy as well as where the major trends are headed.

Until then, keep your head on a swivel and your risk tightly hedged. I get the feeling that the market is about to really start reacting to the US/China conflict narrative.