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

Your Monday Dirty Dozen [CHART PACK]


It is the courage to make a clean breast of it in the face of every question that makes the philosopher. He must be like Sophocles’ Oedipus, who, seeking enlightenment concerning his terrible fate, pursues his indefatigable inquiry even though he divines that appalling horror awaits him in the answer. But most of us carry with us the Jocasta in our hearts, who begs Oedipus, for God’s sake, not to inquire further. ~ Arthur Schopenhauer, in a letter to Johann Wolfgang von Goethe

(Housekeeping note: I sent out an email last week breaking down the repo market and explaining why the spike in ON rates is not a huge deal. A few paragraphs were accidentally left out of the email so if you’d like to read my full note on the topic then click here.)

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at MORE bearish positioning across equities, fund managers buying protection against a fall at a record rate, signs of an intermediate top in gold, and macro indicators that say a recession is still a long ways off, plus more.  Here we go…

  1. Those of you who are members of our Collective are already familiar with this one. But it’s one of the most important charts right now which is why I’m showing it again. The latest BofAML Global FMS shows that fund managers have their lowest exposure to equities since 09’. Investors across the board — from professional to retail — are positioned for a crisis.

  1. From the same survey: Fund managers are buying protection against a drop in the market at their highest rate for which there is data. Once again… Investors are expecting DOOM.

  1. The 1-month smoothed gap between bears (blue line) and bulls (orange line) is reverting from its widest point since the start of this year.

  1. And yet, markets are within a hair’s breadth from all-time record highs. In addition, we’re seeing a plethora of extremely strong positive breadth signals in most major markets around the world. @MacroCharts did an excellent job highlighting these in his recent post (link here). This NYSE Up Volume Ratio is just another one of these charts. It shows that more money is flowing into stocks that are going up versus ones that are going down (chart via Sentiment Trader).

  1. When this has happened in the past, the market has tended to rally significantly over the following 6-12 months (table via Sentiment Trader).

  1. I believe its high odds that a new major leg of this bull market kicks off within the next 3-weeks — possibly following one more dip lower to trap the bears. If so, crowded safe-haven trades such as bonds and gold, are going to get crushed. Take gold for example. It’s currently trading above its upper monthly Bollinger Band.

  1. Net Spec positioning is near record levels. This trade is CROWDED. I think it pulls back to near the $1,400 level. Looked at on a daily timeframe, it appears to be forming a small H&S top. A break below the $1,490 level would confirm this short setup. For what it’s worth, I’m bullish gold longer-term (and have made some good money on this trend higher) but I expect we’ll see a multi-month pullback and consolidation begin soon.

  1. A few weeks ago I pointed out the bullish technical setup in Japan’s Nikkei and shared some fundamental factors for why I like long trade (link here). @MacroCharts had a number of great charts in his breadth writeup and here’s one of my favorites on the Nikkei. It shows the collective breadth thrust that just occurred by graphing the percentage of Nikkei index stocks that just hit their upper BB. Note the last three times this happened.

  1. I didn’t want to leave the bears amongst you completely unfed, so here’s a chart showing the 12-month moving average of US Challenger Job-Cut Announcements. The vast majority of my labor indicators are either bullish or neutral but if this keeps trending higher then we’ll want to take note.

  1. Heavy truck sales (a solid leading econ indicator) though are right up near cycle highs. Heavy truck sales tend to lead both market tops and recessions by a good amount.

  1. Another high-fidelity recession indicator just made new cycle highs. US New Housing Starts have completely recovered from their December lows which shows the US consumer is alive and well. Housing starts typically peak 2-years or more before a recession (the median lead time is 28m from expansion high to the start of a recession).

  1. And one final shot across the bear’s bow. Global PMI which has been contracting since May just put in its first positive month-over-month print since April of last year. Now, I know, hardly does 1-month make a trend but this might be the start of the turn.

Much Ado About Nothing: Repo Rates and Doom Narratives


Oh look, the market found something new to obsessively fret about…

All the fuss is being made over the chart below which shows a “flash crash” in the overnight funding market otherwise known as the repo market.

To be honest, I’m somewhat surprised people are so agitated over this. The repo market is an abstruse corner of our financial plumbing. One that is poorly understood by most and apparently that includes the many financial journos writing hysteria-filled headlines about it.

Take a deep breath. And consider this a short and friendly public service announcement (PSA).

This does not portend doom. Just because we saw similar spikes in the overnight rate in the lead up to the GFC, does not mean this is a precursor to something similar. Like in all things, context matters.

The repo market, to put it in extremely simple terms, is a market where those who have cash can provide very short-term loans to those who need quick liquidity in exchange for safe collateral, such as Treasuries — think broker-dealers who hold lots of securities but need short-term cash loans to fund day to day operations.

The rate at which this money is lent is tied to the fed-funds rate. The fed-funds market is a market for overnight unsecured loans of reserves between banks and other parties. The Fed operates in this market by creating or destroying reserves and lending them out.

New regulations since the GFC require banks to hold a certain level of reserve balances. When the banks experience rising demand for cash relative to their reserves it puts upward pressure on the repo rate, which signals that the Fed needs to add more reserves to the system to allow things to clear.

And it’s in this that the key differences between the repo market issues of today and those that arose in the lead up to the GFC, lay.

You see, rising demand for reserves generally comes from three things (1) Transactions demand (2) Speculative Demand and (3) Precautionary demand. Here’s a clip from a recent report put out by Credit Suisse (CS) explaining the differences.

Transactions demand is based on how much money is being spent. A growing economy or rising inflation supports transactions demand. Transactions are not the same as GDP because many transactions do not add to GDP. Transactions demand is related to money velocity, a slippery and often confusing concept defined by the identity MV = PT (money times velocity equals price times transactions) or MV = PY (money times velocity equals price times income). In these identities money can be base money or a broad aggregate. Usually, it is helpful not to think about money velocity at all or to only consider its inverse, the level of money balances relative to nominal income or total nominal transactions.

 Speculative demand means money held in portfolios as an investment. Raising your cash allocation because you expect bond or stock prices to fall is an example of speculative demand. Speculative demand is more appropriate when thinking about the demand for broad money aggregates than it is for reserve balances. However, banks can decide to increase their reserve balances because they dislike other investment opportunities. The decisions by the Fed in 2011 to pay interest on reserve balances support the speculative demand for reserves.

 Precautionary demand is balances held to meet sudden payment needs. Precautionary demand is nonlinear: it surges during panics. It was once said that precautionary demand is like a gossamer thread on a gusty night. It is near impossible to forecast. In the 19th century and early 20th century, financial panics coincided with spikes in short-term interest rates because fear led to cash hoarding. The best purses shut. Rates soared, forcing liquidations as payment needs became difficult. After the early 20th century, and particularly after the Great Depression, the Fed committed itself to expanding its balance sheet to meet demand and maintain constant short -term rates. This has been done successfully, so short -term rates fall during financial crises in the post war period, the opposite of the prewar period, when the Fed’s balance sheet was less elastic.

As the CS report goes on to note, in 07’ we saw a sudden spike due to “precautionary demand”. Banks and institutions hoarded reserves while demand for reserves spiked. This led to a jump in repo rates. Today, the demand for reserves is being driven by a rise in speculative demand as well as regulatory changes, such as Basel 3, which require banks to hold greater reserve balances.

We’re also seeing supply-side issues such as the rising fiscal-deficit leading to greater treasury issuance which when combined with an inverted yield curve and high USD funding costs, is hurting foreign Treasury demand leading to bloated inventories amongst primary dealers. And, as CS points out “Primary dealers fund those inventories in the repo market. But if the providers of repo funding find themselves constrained and unable to lend, repo rates spike.”

There’s also things like corporate cash demand for quarterly federal tax payments (Monday was the deadline) and things like dividend payouts that lead to these cyclical stresses in the overnight funding market.

CS concludes the report with the following (emphasis by me).

Understanding the institutional details of the funding markets is important for those who seek to understand risks to the financial system. Zoltan has argued that either reserves or collateral face relative scarcity, always. The immediate post-crisis period, with all that QE, was a time of reserve satiation, and therefore a collateral shortage. Now, through myriad forces, it has become apparent that we are back in relative reserve scarcity, in spite of the Fed’s large balance sheet. There is nothing to fear in this, as it is the usual state of affairs. It does mean that the overnight injection of reserves that we have seen today (September 17) is likely to be only the start of the Fed’s attempt to regain a strict hold on overnight rates. Zoltan has laid out various options including QE, a permanent repo facility, or an aggressive reduction in short term rates, to deal with this problem. But one way or another, the classic solution of a steady increase in reserves supply to match an apparent increase in demand is most likely.

 In our view the Fed would be wise to leave interest rate setting to the usual process, which is focused more on growth and inflation concerns than plumbing. Let plumbing decide the balance sheet’s size, stick to a credible interest rate target, and conduct policy accordingly. What we have seen this week is not a crisis but a symptom that we have reentered an old regime for Fed policy operations. To answer the question at the start, is the Fed losing control, we say no it isn’t, but it must now move to allowing its balance sheet to grow in order to maintain its interest rate target. With stable inflation and healthy banks, there is no constraint on the Fed’s ability to do this.

That’s it. The “Repo Flash Crash!!!” is really just an esoteric financial plumbing issue that’s not due to anything sinister and doesn’t presage an impending crisis. It’s something that can and will be handled by policymakers at the Fed, likely through increasing the size of their balance sheet — oh and this would not be a resumption of QE, so disregard those who say it is. It’s literally just managing reserve levels in order to grease the payment settlement system, allowing it to operate properly.

I think the biggest takeaway from all this hoopla is that the doom and gloom machine is still alive and well. Fear is ever-present in this market which is why it’s likely to keep heading much higher.

Mark Dow hit the nail on the head with this tweet.

So feel free to block out this nonsense and continue on with your day.

Oh, and for those of you who want to learn more about this issue then I highly suggest giving this Odd Lots podcast with CS’s Zoltan Pozsar. Pozsar probably knows more about the internal plumbing of our financial system than anybody. He’s my go-to for learning about this space.

Oh, How Quickly The Narrative Pendulum Swings!


Take two minutes and watch this video I clipped together contrasting the intros to Bloomberg’s Real Yield show which is a weekly panel discussion with some of the biggest fixed-income managers in the world. The first half is from August 30th and the second September 13th. What a difference two weeks makes…

There is nothing like price to change sentiment. In a market where the narrative pendulum swings back and forth faster than a politician flip-flopping on a key issue, it’s paramount to track the sentiment cycle and Play the Player.

And, really, this all just goes to show that nobody actually knows anything. We’re all just making up grand stories to tell each other so we can disguise our uncomfortable ignorance as we play this incredibly complex game.


A Monday Dirty Dozen [CHART PACK]


Opinion is like a pendulum and obeys the same laws ~ Arthur Schopenhauer

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at technical and sentiment indicators showing short-term overbought levels in US equities, incredibly low hedge fund exposure to stocks, the ‘pain points’ for CTAs in bonds, really cheap European banks and more. Here we go…

  1. We saw the bullish thrust in stocks that we were expecting but now things are overstretched and odds are we see a slight pullback in the coming week(s) before the next leg higher, though we can’t rule out the possibility of a short FOMO pop higher either. Dow Transports (IYT), Russell Small-caps (IWM), S&P 500 (SPY), and Semis (SMH) are all knocking on significant resistance on a weekly timeframe.

  1. Supporting the above, my short-term indicators for overbought/oversold technicals and sentiment show that the market is going to need a breather soon. The 3-day MA of Calls/Puts (thin red line) is beginning to signal complacency and 14-day RSI is becoming stretched.

  1. Nomura’s Equity Market Sentiment Index is also showing that sentiment has quickly flipped from uber-bearish to bullish in the US — too quickly for my liking and tells me that we’re likely to see a bumpy trend higher or another severe washout to cement enough pessimism for a smooth run-up. Also, check out Japan. Its bullish sentiment is over the 2 sigma level. I wrote the other week (link here) about why I’m bullish Japanese stocks but, like the US, it’s technically overbought and sentiment is a little too hot. Gotta wait for a pullback.

  1. Here’s the average pattern of Nomura’s global equity sentiment index following a drop below the -1 sigma level. If we follow the historical pattern then we should see sentiment flip over on September 20th.

  1. I’m bullish looking out past 1-2 weeks and one of the BIG reasons is positioning, which I’ve been noting nearly weekly here in these pages over the last month. Here’s a great chart from Sentiment Trader showing that hedge funds are grossly under positioned considering the macro backdrop. That’s a LOT of fuel for the next leg higher.

  1. The run-up in stocks has put the squeeze on crowded bondholders who’ve suffered one of their biggest routs in years. Nomura’s nifty CTA positioning tracker breaks down the likely ‘pain points’ of systematic trend followers in the UST 10-year. The next measured liquidation area is at 1.93% (yields ended the week at 1.90%).

  1. Sentiment Trader’s Bond Optimism Index fell below 50 for the first time in over four months on Friday. The backtest shows that bonds on average experienced a snapback rally over the following 2-weeks before resuming their downtrend (note: this would fit well with our expected short-term retrace in stocks and offer an excellent entry to get short bonds if you’re not already).

  1. I thought this chart was interesting. BofAML recently pointed out that the main risk to US IG isn’t supply but rather demand. And that’s because the ownership share of bond funds and ETFs has risen sharply to 21.4% from just 12% a decade ago. The bank points out that the issue is that “this segment tends to be returns-sensitive, as retail investors chase performance.” The chart on the right is case in point. There’s the possibility that a bond tremor sets off a further bond tremor as traders clamor for the exits.

Also, I highly recommend taking two minutes and watching this short video (link here) I clipped together comparing intros from Bloomberg’s weekly Real Yield show. The first half is from the Aug 30th and the second part is from this weekend. I love this… I mean, just two weeks and look at the change in sentiment. The narrative pendulum swings so incredibly fast in this environment, if you don’t pay close attention you’re likely to get steamrolled.

  1. Another troubling trend for bonds over the near-term is the recent jump in inflation. The 3-month annualized growth rate in core CPI just hit its highest level this cycle.

  1. If you’re wondering where this jump in inflation is coming from, well, look no further than the trade war. This spike is being entirely driven by the rise in core goods CPI which is a direct result of tariffs (chart via Wells Fargo).

  1. Just think what could happen to bonds once the policy baton gets fully passed from monetary to fiscal. Negative yields in Europe have been helping to drag down those in the US. If fiscal spending picks up in Europe and yields there begin to rise, then there goes the anchor…

  1. Speaking of Europe, banks there are trading near all-time lows relative to ‘fair value’. According to Morgan Stanley, similar instances in the past have led to periods of extended outperformance. Deutsche Bank (DB) is up more than 30% over the last month…

A Monday Dozen [CHART PACK]


I’m also a firm believer in predicting price direction, but not magnitude. I don’t set price targets. I get out when the market action tells me it’s time to get out, rather than based on any consideration of how far the price has gone. You have to be willing to take what the market gives you. If it doesn’t give you very much, you can’t hesitate to get out with a small profit.~ Linda Bradford Raschke

Good morning!

In this week’s Monday Dozen we look at the historical magnitude of the current tech bubble, the incredible financialization of our economy, the best-performing assets year-to-date, the end of an era, and much much more. Let’s begin.

  1. The S&P is within spitting distance of all-time highs but investors aren’t buying it. AAII Bull-Bear sentiment remains in the gutter. This is bullish and makes it odds on we see new highs in US equities very soon.

  1. Here are the subsections of the AAII survey broken down. See the chart in the bottom right-hand corner. Investors are holding their lowest levels of stocks relative to cash and bonds since January of 13’. This can mean two things (1) there’s a lot of potential fuel to drive this coming bull leg higher or (2) there’s trouble ahead because we need investors to eventually start buying in.

  1. At least one would think so because how much longer can this lopsided equity demand trend continue?

  1. If equities are about to rally like I think they will then crowded bond longs may be in for a world of hurt. The US Citi Economic Surprise Index (CESI) just turned positive for the first time in nearly 150 days. Bondholders, MIND THE GAP….

  1. When I reference the financialization of the economy, this is what I’m referring to. This is why investor confidence is so critical to the economic cycle. The financial asset tail now wags the economic dog (chart via BofAML).

  1. While I’m expecting a large pullback in bonds (jump in yields) over the coming months, I ultimately think US yields go lower. All the way to zero. Demographics are the reason why. We’re seeing the Japanification of the world.

  1. The majority of my liquidity/fin-stress indicators are healthy and giving little cause for alarm. But, the Chicago NFCI is close to hitting multi-year highs (chart is inverted). I think we’ll see this turnaround but if it doesn’t then we’ll want to pay attention. Note the strong correlation between the NFCI and the SPX.

  1. Raise your hand if you came into 2019 predicting Greek stocks and bonds to be amongst the best performing assets globally. If your hand is up then you’re a liar :). Also, notice there’s quite a lot of European assets in the top 10 which is funny because they’ve been universally shunned by investors.

  1. There’s been constant negative coverage of the European economy over the last year with the manufacturing recession in Germany and fears over Brexit and all that. But it doesn’t look like anybody has told the European consumer. European households appear to be the most optimistic about their financial situations in a very long time.

  1. And inflation-adjusted retail sales are still growing at a healthy clip.

  1. The FAANG HODL trade may be nearing its end as things are looking a bit… much? This chart from BofAML shows that Tech as a share of profits vs. prior bubbles is at historic extremes.

  1. The end of an era. Deglobalization is going to reshape the world in ways we can’t even begin to imagine. This trend is only just beinning and will play out for a looong time.

A Monday Dozen [CHART PACK]


One of my strengths over the years was having deep respect for the markets and using the markets to predict the economy, and particularly using internal groups within the market to make predictions. And I think I was always open-minded enough and had enough humility that if those signals challenged my opinion, I went back to the drawing board and made sure things weren’t changing. ~ Stanley Druckenmiller

Good morning!

In this week’s Monday Dozen we look at bitcoin’s technicals, small-caps nearing a relative performance 70yr+ trendline, easy Q3 earnings hurdles, spiking global economic uncertainty and more. Let’s dive in.

  1. Bitcoin (BTCUSD) is at a critical level having consolidated near the lower support of its triangle. BTC has proven to be one of the purest charting markets. Typically, you want to sell if price breaks below this support level as it means a continued downtrend is likely.

  1. But Peter L. Brandt (@PeterLBrandt) offers another interesting possible path for the cryptocurrency. Here’s a chart he shared suggesting that $BTC may be entering its “fourth parabolic phase”.

  1. This is a great chart from @waltergmurphy showing the 100-year history of US small-caps relative to large-cap stocks. Large-cap outperformance has driven the index down to its long-term 70yr+ trendline. The question now is, will we see small-caps begin to outperform (bounce off the trendline) or will we see a relative performance overshoot similar to what we saw in 2000?

  1. Consensus earnings expectations for Q3 have fallen considerably over the last two months. Average analyst expectations now call for EPS growth to fall by -2.6% Y/Y. Similar to Q1 and Q2 this negative sentiment is setting the earnings bar pretty low, which means an easy hurdle that the market should have no problem clearing.

  1. This chart from @MacroCharts of Citi’s FX Positioning Indicator shows that traders are extremely short US dollars. This could drive a further pop in the dollar which would not bode well for commodities or EM stocks, especially gold which is extremely stretched on a technical basis.

  1. The NYSE Advance-Decline Line made a new all-time high on Friday (chart via Sentiment Trader). This is not bearish. A new high in the A/D line typically leads to higher highs in the market in the following months.

  1. People are nervous. The Economic Policy Uncertainty Index shows that uncertainty over future economic policy is pervasive. In the past, a high index reading like the one we’re currently seeing has often preceded enduring gains in the market.
  2. This chart from Sentiment Trader is wild. ST notes that “Not only is the 4-week total outflow extreme, we can see that it’s been consistently negative. So much so that the 52-week total is nearing 2% of total fund assets, the most since the end of the 2002 bear market.”

  1. Via Bloomberg, “For the first time since 2009, dividend yields exceed 30-year Treasury yields”.

  1. The Aggregate Cash Flow Statement for MSCI US Large Cap 300 stocks via HSBC.

  1. Spec long positioning in the S&P 500 has fallen to levels that marked the Dec 18’ bottom and not far from those which marked the 16’ bottom in the market.

  1. A NASI buy signal was triggered on Friday. While my base case is for more chop ahead in US stocks, the odds of an impending bull run are increasing.

A Monday Dozen [CHART PACK]


I have a friend who has amassed a fortune in excess of $100 million. He taught me two basic lessons. First, if you never bet your lifestyle, from a trading standpoint, nothing bad will ever happen to you. Second, if you know what the worst possible outcome is, it gives you tremendous freedom. The truth is that, while you can’t quantify reward, you can quantify risk ~ Larry Hite

Good morning!

In this week’s Monday Dozen we check out short-term sentiment (still too bullish!), longer-term sentiment (getting pretty bearish), indications of a weakening US economy, credit stress, a long opportunity in the pound, a crowded consensus, and 250-years of stock and bond correlations…

  1. When trying to gauge the durability of a potential market bottom we need to observe how quickly the dominant narrative flips. A sustainable rally needs to climb a wall of worry and general disbelief. When we see market participants quickly switch from bearish to bullish on a small bounce in price, it means that the market is likely to inflict more pain on the downside. Our NAAIM Extreme Exposure Index which measures the number of respondents who say they’re leveraged long the market saw a significant bounce this week. This along with my other sentiment/positioning indicators tell me we likely have more downside and chop ahead.

  1. With that said, the longer-term sentiment and positioning backdrop is potentially setting up for another significant bullish advance. The chart below via Sentiment Trader shows the 3-week average of AAII Bulls is near extreme lows, which in the past has often led to big gains over the following three months.

  1. The Philadelphia Fed Coincident State 1-month Diffusion Index bears keeping an eye on. This coincident index measures four state-level indicators for each of the 50 states. It recently fell to new cycle lows. In the past, similar weakness has often preceded a recession.

  1. The Conference Board’s Leading Economic Index (LEI) on the other hand, just made a new cycle high. The LEI has correctly signaled all eight recessions since its inception in 1959. It turns over and heads lower an average 10.5 months before a recession begins.

  1. Downgrades in high-yield credit are about average Note the uptick in downgrades in 07’ the preceded the GFC (chart via Moody’s).

  1. And Moody’s Liquidity/Covenant Stress Index remains subdued.

  1. The pound (GBPUSD) is bouncing off of long-term support (chart below is a weekly).

  1. Specs are very short.

  1. And sentiment is very dour…

  1. The flows into bonds have been massive since the end of last year (chart via BofAML).

  1. We’re literally nearing the point where not a SINGLE soul thinks long-term interest rates will rise… Pay attention to the consensus narrative! (chart via BofAML)

  1. This great chart from Bernstein Research shows that the correlation of stocks and bonds over the last 20-years is its most negative over 250-years of data. As Bernstein notes “This has been incredibly beneficial to asset owners and is a part of the reason why it has been so desirable to simply hold a passive 60:40 combination of equities and bonds… but if it was a function of the movement lower in inflation and real growth and changes in monetary policy then it might not be possible to rely on such a benign state of affairs continuing.”