Trading Politics – Part 1

Tyler here. 

This month I started a video series called Trading Politics over on our partner youtube channel Fallible

The first video introduces the most popular political prediction market in the United States, PredictIt.

In the past we’ve used the prediction markets on PredictIt to help us position our portfolio during key election events. 

The two most notable ones were the Trump upset in 2016 and then the subsequent French election in 2017 when the whole world was freaking out about Le Pen taking charge. 

When the markets on PredictIt diverge from the option markets going into an event there’s money to be made because someone is wrong… either the traders on PredictIt or the traders in the market. 

There are multiple ways to play a disparity, you can take an outright position on a PredictIt political contract or another option is to go into traditional financial markets and find a trade that will benefit off of a political “surprise.”

Since the 2016/2017 election year, interest in politics (and betting on its outcomes) has increased considerably. 

PredictIt spreads 100s of markets now ranging from election results, to impeachment odds, to weekly tweet markets for Trump.

(Yes you read that right you can make money betting on how many times Trump will tweet in a week!)

I’m starting the Trading Politics series to gear everyone up for the 2020 election year. I expect fireworks again just like the 2016 election year that will bring us a ton of opportunity to profit using the PredictIt platform as dumb money flows in to back their favorite candidate. 

We recently partnered with PredictIt and they’ve given all of our readers an opportunity to earn a 100% match on their initial deposit up to $20. 

All you have to do is click the link below and deposit $20, then PredictIt will match it and you can start trading on the platform! 

Click here to open up a PredictIt account and claim your free $20! 

I’m excited for this. Trading a market like PredictIt not only allows us to make money on the politico noise, it also serves as a valuable cross-training tool for financial trading. The skills we pick up by sniping the PredictIt mispricings will carry over into our normal trading and level us up further. 

That’s all I got for today! 

Happy Trading.


Your Monday Dirty Dozen [CHART PACK]

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).

  1. 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.

  1. 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.

  1. 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.

  1. 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.

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

  1. 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.)

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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).


Your Monday Dirty Dozen [CHART PACK]

It is poor policy, I find, to wait for Opportunity to knock at your door. I train my ear so that I can hear Opportunity coming down the street long before it reaches my door. When Opportunity knocks, I try to reach out, grab Opportunity by the collar and yank it in.  ~ Richard D. Wyckoff

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at price targets following new record highs, check out rising global markets, dissect fund flows to see where capital is headed, look at world equity valuations, and see what’s going on in Putin’s Russia, plus more…

  1. Both the S&P 500 and Nasdaq made new all-time weekly highs last week. The technician Peter Brandt (@PeterLBrandt) has a measured move target on the S&P of 3,524. Approximately 15% higher from current levels.

  1. This chart from Callum Thomas (@Callum_Thomas) shows it’s not just US markets that are moving higher. The percentage of countries at least 20% off their 52-week lows is trending up from a very low base.

  1. We’re starting to see a reversal in flows out of bonds and into equities for the first time in a long while (chart via BofAML).

  1. Like a rubber band that has been wound tight, there’s plenty of potential energy to unravel. A process that could spark a flood back into risk assets (chart via BofAML).

  1. The reason behind the lopsided flows is that money managers are bearish… and I mean extremely bearish… Barron’s latest “Big Money Poll” finds that only 27% of fund managers surveyed are bullish on stocks over the next 12-months. That’s the lowest bullish reading in more than 20-years.

  1. Valuations in the US are back near levels that in the past have acted as headwinds for equity market returns. This doesn’t mean we can’t see US multiples expand further (they probably will). But it increases the fragility of the trend.

  1. It also means that investors who now find themselves horribly underinvested and who are looking to dramatically up their exposure to equities may look elsewhere.

  1. The US has long earned its valuation premium over the rest-of-the-world due to its strong trend in earnings. But, BofAML noted in a recent report that this trend may be changing, writing “The US one-month ERR (0.49) has dropped below the global ERR (0.65) which is unusual. Note that in the post-crisis period, the S&P 500 ERR has been above the Global ERR 74% of the time, underscoring the earnings prowess of the S&P 500 relative to other regions due to its secular growth and quality biases. Are the tides shifting? Other signals suggest shifts from the US to other neglected pockets. Our global team notes that the October ratio improved the most in Asia Pac ex-Japan and Emerging Markets, but the ratio fell the most in the US (Europe’s ratio remained unchanged).”

  1. Equity markets have been benefitting from improved financial conditions this year relative to last. One of the few remaining conditions that have been tightening liquidity has been the persistently strong US dollar. But the USD is back below its 200-day moving average and as I noted in last week’s Dozen, we might finally be seeing the turn in King Dollar. A trend that would further boost financial conditions and make underweighted ex.US assets even more attractive.

  1. One of the cheapest markets at the moment is Russia (RSX) which just broke out to new multi-year highs last week.

  1. Remember how a month ago the bears were sharing this chart of the ISM Manufacturing New Export Orders which had just hit new post-crisis lows? Well, it just rebounded in one of its strongest MoM reversals. I wonder why those same people aren’t sharing the chart now?

  1. Finally, one of my favorite leading recession indicators, the Philadelphia Fed Leading State Index, came out with another solid print this last month (when it crosses below the red horizontal line is when you need to worry). Just another sign, amongst many, that a recession is still a ways off.


Your Monday Dirty Dozen [CHART PACK]

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”.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

  1. 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.

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

  1. 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).

  1. 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.


Your Monday Dirty Dozen [CHART PACK]

It may be readily conceived that if men passionately bent upon physical gratifications desire greatly, they are also easily discouraged; as their ultimate object is to enjoy, the means to reach that object must be prompt and easy or the trouble of acquiring the gratification would be greater than the gratification itself. Their prevailing frame of mind, then, is at once ardent and relaxed, violent and enervated. Death is often less dreaded by them than perseverance in continuous efforts to one goal.
~ Alexis de Tocqueville

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at the widening gap between the positive hard data and the horrendous soft data, we check in on global central bankers to see what they’re up to, take a look at earnings season and where the beats and misses are trending and more…

  1. There’s been a lot of talk about the growing divergence between hard and soft (survey) data over the past few months. Here’s a great chart from Citi showing just how unusual the current gap between the two is. The red circles highlight the fact that when the two diverge it’s usually the soft data the reverts back to the hard economic numbers. The one time this didn’t happen though was in 2008 so… feel free to go ahead and use this chart to confirm your priors.

  1. A benefit of the declining global economic picture, for risk assets at least, is that it has central bankers around the world hitting the gas pedal again. The percent of central banks cutting rates hit its highest level since the GFC this month (chart via FT).

  1. Citi’s Bear Market Checklist is still giving the all-clear. Current warnings only add up to 25%. For an official bear market signal, we need to see amber and red warnings add up to over 50%.

  1. I think this quarter’s earnings will be the big tell on where things are headed in the intermediate-term. And we have a busy week on that front, with a number of highly followed companies reporting over the next five days (chart via Earnings Whispers).

  1. So far, companies have had an easy time hurdling the low bar (pessimistic earnings consensus) with 84% of S&P 500s companies that have reported so far, surprising on the upside.

  1. That’s not to say the longer-term earnings picture is all hunky-dory. NDR’s SPX Earnings Model, which breaks earnings into two main categories (1) strong earnings growth and (2) weak earnings growth, shows that the trend has just moved into the “Weak Earnings Zone”. There’s been a number of instances where the model has crossed into these levels only to rebound later but something to keep in mind (chart via NDR & CMG Wealth).

  1. One thing that I think isn’t properly appreciated by the bears is just how much buybacks are driving this bull market. Net share destruction (share issuance – buybacks) has been significant. Companies buying back their stock has been pretty much the only demand source propping up this market year-to-date as investors have been net sellers for the most part. It’s difficult for me to see how this trend doesn’t continue as long as the credit market stays willing to fund it, which they appear to be at the moment (chart via NDR and CMG Wealth).

  1. The money supply in the US (both M1 and M2) has been picking up since the beginning of the year.

  1. This graph from Sentiment Trader shows that when the 12m growth in M2 is greater than 5.5%, as it is now. It tends to be positive for stock market returns going forward.

  1. @TN shared this great chart last week showing the Rydex Bull-Bear Asset Spread. When this ratio spikes, like it is now, it means that investors are positioning defensively. The highlighted points note that this is almost always a bullish sign going forward for the market.

  1. This graph from Koyfin (the best free charting and market analysis tool out there) shows country ETF performance over the last month. I like to regularly check up on this gauge of short-term momentum to see where the money is flowing. It looks to me like capital is starting to make its way back to the undesirables (the unloved and underweighted). Europe and Lat-Am, and even parts of Asia are worth a look. If the dollar breaks here then these will take off like a banshee.

  1. Malaysia (EWM) is one of these charts worth watching. It’s nearing 10-year lows and has been trading lower in a tight coiling descending wedge pattern. Patterns like this often precede explosive moves higher. Plus, I hear the country is readying major tax cuts and fiscal stimulus is on the way.


Your Monday Dirty Dozen [CHART PACK]

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.

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

  1. 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.

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

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

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

  1. @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.

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

  1. 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.

  1. 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.

  1. 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…

  1. 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.


Part 2: #Recession2020, Really? A Review of the Data

I’ve got some bad news…

According to this guy, there’s at least a 70% chance we enter a recession next year, maybe sooner.

It’s not just James of “Financial  Education”. It’s literally every popular social media influencer on youtube predicting a major slowdown in the economy over the next 12-months.

I guess it’s time to sell our longs and leverage our shorts guys, and gals. Praise be to these high-minded Tubers who bless us with their all-knowing economic wisdom…

Alright, enough sarcasm.

I’ll be honest, the probability of a recession has increased since the start of the year. It’s gone from basically nill to maybe 35% odds we’ll see one in the next 12-months — these are very fudgy numbers just fyi. I should note that I will adjust these numbers dramatically and without shame, if the data significantly deteriorates or improves.

And therein lies an important point. What’s up with everybody’s obsession in trying to predict a recession, anyway?

I get it if you’re a business owner and you don’t want to take on too much leverage before an extended slowdown in the economy or something. But as traders and investors who mostly deal in highly liquid instruments why spend so much time and effort on trying to play Nostradamus and predict what’s going to happen to something as complex and dynamic as the US’s $20trn economy 12-months out?

I’m not saying it’s not important to pay attention to the macro trends — of course, it is, we’re macro traders after all and I’ll walk you through our basic recession dashboard here in a sec. What I am saying is that I think there’s a not too small population of traders and investors out there (maybe even the majority) who see a recession around every corner and react to every dip in the market as if it’s the BIG one.

I’m guessing they’re playing the “let me show everybody how smart I am versus making money game” that we talked about earlier this week. That or they’re trying to sell a newsletter. Hey… being bearish sells. That’s why you see so many unapologetic bears on Twitter who’ve been spewing doom and gloom for the last 7-years. It’s making them money, not investing money, but loads of subscription money

Thank GOD these people exist because they create the wall of worry that drives the beautiful bullish trends for us to exploit.

I digress…

Here’s how I think about recessions.

Actually, first, a quick PSA.

Recessions are not two consecutive quarters of negative real GDP growth as most think. Rather, the NBER defines them as “a significant decline in economic activity spread across the economy, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and wholesale-retail sales.” Formal recessions aren’t identified until well after the fact.

Now that we have that out the way. Here’s how I think we should think about them.

Traders and investors don’t trade recessions. We trade the market. The market performs poorly in a recessionary environment. Dips that were once bought, tend to be sold. And a  consecutive number of lower highs and lower lows in the indices, spawn a bear market. During this time we want our bias to be to the short-side.

The market is one of the “best predictors of recession” as Stanley Druckenmiller likes to say. Our collective wisdom is actually pretty intelligent — and sure there’s a reflexive self-fulfilling component in there too. This is why the SPX peaks on average 7-months before a recession hits. And yeah, the market will give false signals from time to time but that’s where the rest of our “weight of the evidence” comes in handy; to tell us if this dip is really the start of a new cyclical trend or just another vanilla bull market retrace.

I guess that’s the point I’m trying to make. We play the technicals in front of us while keeping an eye on what’s on the horizon. But we’re limited in how far we can see. Things are always a little hazy when they’re further out in time. It’s counterproductive to spend much time or energy playing the prediction game (again, unless you’re trying to raise AUM or sell a newsletter) when instead you should be teeing off what’s happening in the market and its internals, now.

You can do better by spending just a few minutes every month going through the Recession Dashboard below. Flip through our leading and coincident indicators and then put them in context with what the market is saying (which I talked about earlier this week).

We want to look at this data holistically. Remember, it’s about the weight of the evidence. Not what one or two indicators are doing.

As of right now, the odds of a recession are fairly low. The LEI, which has led every recession (median lead time is 10-months) since its creation roughly 50-years ago, is at cycle highs. So is New Housing Starts. Initial claims troughed 5-months ago but they haven’t started trending up and are still well below their 36-month moving average. The 2s10s yield curve only briefly inverted 2-months ago and that one tends to have a long lead.

*** Click on the indicators to see the charts***

Early U.S. Recession Indicators
Indicator Median Lead Time Current Cycle Key Recession Level Current Level
Conference Board LEI Peak  10-months New cycle high Negative YoY% +1.08
Yield Curve Inverts (2s10s)  19-months 2-months NA NA
Initial Claims (4wk avg) Trough 8-months 5-months 36-month MA crossover Well below
SPX Peak 7-months 2-months Below 50-week MA Above
New Housing Starts Peak 28-months New cycle high NA NA
Leading/Coincident U.S. Recession Indicators
Indicator Key Recession Level Current Level
Consumer Confidence Index 36-month MA crossover   Above
Breadth of Philly Fed State Leading Indexes Below 0.7 1.4
ISM Manufacturing Index Below 44 47.8
ISM Non-Manufacturing Index Below 51 52.6
Conference Board’s Business Confidence Index Below 43 34
Unemployment Rate 12-month MA crossover Below
Real Retail Sales YoY% Negative YoY% +2.3%
Adjusted National Financial Conditions Index Above 0 -0.65
Kansas Fed Financial Stress Index Above 0 -0.35

The real weakness has been in the soft data. The ISM and Conference Board Surveys. The CB CEO survey is abysmal. No doubt some, or much, of that weakness can be attributed to the trade war. The rest of the data shows a slowing though still positive growth economy.

Financial conditions remain incredibly loose. Consumers are still spending and the labor market isn’t showing signs of serious deterioration.

If more of these indicators begin to flip red and we start to see the US market turn down along with participation begin to crumble, then we’ll want to update our odds. Until then, focus on the market trend.

One final thought that I want to leave you with today.

The US and rest of the world (RoW) decoupled about 18-months ago. Growth in the US and ex.US began to fade going into 18’ due to decelerating Chinese credit growth and the US moving to the backend of a large fiscal impulse (tax cuts) — yeah sure, the trade war mattered too but not as much as everybody thinks. And while the US stayed buoyant, mostly thanks to a strong consumer. The RoW flipped over on its belly…

This is why most ex. US markets have spent the last 21-months or so in a bear market downtrend or, at best, sideways range (as I noted here). Much of the world was in a recession as shown by NDR’s Global Recession Probability Model below.

This slowdown began in earnest in the spring of 18’. Ex. US slowdowns tend to last 14-months on average which would put this one ending sometime around now, give or take a few months.

Now China is a black box and I prefer to consume a large helping of salt when I look at their numbers (and why I like to check their data against 3rd party sources). But, there are tentative signs that growth may be in the process of bottoming.

We shouldn’t expect to see global growth hockey stick as we saw in 16’. The CCP has made it clear they’re serious about reigning in leverage so a flood of Chinese credit probably isn’t on the way. But… the CCP is even more concerned with keeping Chinese unemployment low and social sentiment elevated. So maybe we see some more easing at the margins from them which makes for a decent if underwhelming bounce in global growth.

If this ends up being the case… well, let’s just say there’s a lot of money that’s offsides and will need to be put back to work…

But then again, who knows…  maybe Jeremy and all the other Tubers end up being right. Maybe we do get hit with a recession in 2020 — it’d be the first time that I know of where we all saw the big one coming.

Really, that’d be fine too. The tape will tell give us a heads up and our data will confirm the tape.

P.S. Fall enrollment for the Macro Ops Collective has begun! We regulate the number of new signups because we’re going for quality over quantity and want to make sure we’re able to provide the most value to our fellow Collective members as possible and keeping the inflow limited helps us do that. If you’re interested in checking us out then go ahead and click this link here to see what’s on offer or feel free to shoot me an email with any Qs you may have at alex@macro-ops.com.

Either way, thanks for being a reader and good luck in the markets.


Part 1: The Tape Tells All

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.


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.


Your Monday Dirty Dozen [CHART PACK]

It is important to see distant things as if they were close and to take a distanced view of close things.
~ Miyamoto Musashi, The Book of Five Rings [1645CE]

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at the trend in global PMIs and what that’s meant for sector returns going forward, plus we look at falling oil demand and dropping rig counts, and end with a look at some lending data and a coiling high carry FX trade. Here we go…

  1. Global manufacturing PMIs have fallen into contraction territory in recent months, with DM markets leading the way (chart via BofAML).

  1. This heatmap of global manufacturing PMI levels and their 3-month changes gives a more under the hood look at the deterioration in growth globally (charts via MS).

  1. One interesting standout though is emerging markets where growth seems to have potentially bottomed and is now rebounding. The chart below is of IHS Markit’s emerging markets manufacturing PMI which hit 51 last month.

  1. The market’s forward returns have a high correlation to the trend in ISM manufacturing PMI. The graph below from MS shows how various assets have performed along certain points in the PMI sine curve. In the current environment, where the PMI is low and falling, value tends to outperform growth; with energy, materials, and consumer staples leading the way.

  1. The deteriorating global growth backdrop has led to a huge revision in expectations since the beginning of the year. The consensus is now expecting 0.5% EBIT growth and just 2% growth in earnings per share for the year (chart via UBS).

  1. This slowdown has led to the lowest YoY% growth in global oil demand since 2012 (chart via BofAML).

  1. Lower oil prices are leading to a drop in rigs. I wonder if the energy sector has finally had its come-to-Jesus-moment. Maybe this time they’ll maintain capital discipline should we see another bounce in prices following this rout— once bitten, twice shy perhaps?

  1. Our Put/Call moving average indicator that we talked about last week triggered an official buy signal shortly after. My expectations are for further chop over the coming week before another leg down to wring out the last of the bulls. But we have things like BofA’s Bull & Bear indicator showing extreme bearishness and strong price action in semis, so there’s a chance the market goes on a bit of a run here.

  1. I’ve discussed the peso (MXN) a number of times in these pages over the last few months. It’s the highest yielding major currency out there that also happens to have the lowest forecasted spot returns (read: bearish consensus). I love the chart. It looks like a classic bottoming pattern to me + the MEXBOL looks like it’s put in a bottom after a 2-year bear market. Keep an eye on this one…

  1. Bloomberg Economic’s new recession probability model is giving just a 16% probability of the US heading into recession over the coming 12-months. The model incorporates “a range of financial market indicators, activity data, and measures of background imbalances.”

  1. Speaking of recession, some of the lesser-known data that I like to regularly check up on is that from the Fed’s Senior Loan Officer Survey (aka SLO data). It gives you some good insight into the lending market which is important since our economy lives or dies on the supply and demand of credit. And as of right now, there’s little in the SLO data to suggest much cause for alarm.

  1. I think I shared this chart not too long ago but I’m doing it again because it’s such a great technical setup — the macro and fundamental backdrop also happens to be incredible. It’s a weekly chart of Scorpio Tankers (STNG), a shipping stock and also my largest holding. It broke out of a multi-year inverted H&S bottom last week. You can read my bull thesis on shipping here.


Your Monday Dirty Dozen [CHART PACK]

The market anticipates, while the news exaggerates. ~ Bob Farrell

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at more short-term sell signals indicating further downside ahead, a massive collapse in global auto demand, a profit contraction in Germany and a possible recession in Mexico, plus some unprofitable IPOs and 230-years of global debt. Here we go…

  1. Both NASI and NYMO (McClellan summation and oscillator indexes) triggered sell signals this week telling me that the overbought levels I noted two weeks ago (link here) are still being worked off. I’m looking for more downside over the next week or two. And with the increased tape bomb risk floating around, make sure you’re keeping your head on a swivel and managing your risk tight.

  1. My base case remains that this decline will be laying a trap for bears, of which there seems to be a growing number — did you know that #recession2020 is a trending tag on Youtube? Apparently all the big social media influencers are making videos about how to prepare for the coming crash. I think I’ll fade that… Anywho, our near put/call sell signal from 2-weeks ago has mostly reversed and it looks like we may see a firm buy signal triggered (red line crossing above green horizontal) in the next couple of weeks should the market take more of a dip here.

  1. This would be great since it’d bring down our other sentiment/positioning indicators (the MO Sent/Pos Composite indicator is still a bit too elevated for my liking). I’d like to see Extreme Exposure flatten out as we saw at the previous three bottoms.

  1. This chart, is, um… quite the sight. Global auto sales have fallen some on a YoY% basis. Semiconductors haven’t been doing too hot either.

  1. Where is this big drop in global auto sales coming from? Well, it’s due to a number of factors. Both China and Germany changed their emission regulations recently which led to car buyers in both countries deferring purchases (this drove the largest YoY% collapse in China’s auto sales over the last 30-years). Plus, there’s India who also recently saw their largest fall in vehicle sales in nearly 30-years.

Unlike China and Germany, India’s lack of demand for autos is due to a liquidity crunch that was sparked by the collapse of a major shadow bank which has tightened consumer lending in the country. This, along with the general slowdown in China, is what’s behind the global manufacturing recession (chart via @JKempEnergy).

  1. We can see the drag from autos on global industrial production below (chart via Credit Suisse).

  1. The slowdown in China and the collapse in auto sales have reverberated across the global economic system, dragging growth and trade down with it. The share of PMI New Export Orders has been falling for the last 18-months and now sits at its lowest point since 2012 (chart via NDR and CMG Wealth).

  1. Germany has been one of the hardest hit from the global manufacturing recession since their economy is so dependent on high-end exports (autos especially). Corporate profits in the country recently saw their largest YoY% decline since 2013 (chart via Credit Suisse).

  1. Mexico, whose economy is extremely exposed to the global swings in manufacturing and trade, just saw its first negative YoY% drop in GDP since the GFC. The Bloomberg Recession Indicator is signaling the highest probability of a recession in Mexico since 2013.

  1. And with tariffs set to rise substantially going into the end of the year, the trade war sure isn’t helping things (chart via Credit Suisse).

  1. We’ve seen a surge in the number of unprofitable companies IPO’ing over the last few years. But it still pales in comparison to the bonanza we saw at the height of the tech bubble (chart via Bloomberg).

  1. “What has been will be again, what has been done will be done again; there is nothing new under the sun.” ~ Ecclesiastes