Monday Dirty Dozen [CHART PACK]


Politics is the art of looking for trouble, finding it everywhere, diagnosing it incorrectly, and applying the wrong remedies. ~  Groucho Marx

In this week’s Dirty Dozen [CHART PACK] we look V-shaped, L-shaped, U-Shaped and other alphabetical themed paths for the recovery in growth. We then dive into more fiscal stimulus graphs, look at some indications of growing inflationary pressures, before covering gold drivers, wretched market sentiment and investor flows, and more.

Let’s dive in.

***click charts to enlarge***

  1. BofA wrote in a recent report that “global stabilization of daily case growth rates near 0% (Chart 1) tells us phase 1 of the COVID crisis is over. US daily growth rates have been in the 1%-2% range, a little elevated but well below the 7%-9% daily growth rates of a month ago. Phase 2 started on May 1, as the US began the reopening process.”


  1. The phase 1 lockdown caused quite the drop in GDP. For all of those assigning various parts of the alphabet to the describe the shape of the coming recovery, Morgan Stanley says there’s only one, writing “If history is a guide, ‘U’ may actually stand for ‘Unicorn’ because U-shaped recoveries coming out of a recession really never happen.”


  1. I know I keep sharing graphs of the fiscal and monetary response in these pages but I’ve got some more today. The size of the responses to date have been enormous… absolutely gargantuan. Like maybe enough to stop a bear market dead in its tracks kind of size — I’m not saying that’s the case here, just that it’s a possibility we all need to entertain.

This chart from GS shows the US fiscal easing measures to date compared to those of the last crisis.


  1. Much of this spending has already taken place but we can rest assured that plenty more will be coming down the pipe. I don’t think there’s a single hawk left within a 1,000 miles of D.C.


  1. Last one on the fiscal side. US federal debt is set to take out WW2 highs within the next couple of years.


  1. All this money flooding the market has a lot of people talking inflation. BofA writes that “like stagflationary 1970s we see clustered, volatile, low real & nominal returns coming decade, higher volatility, weaker US dollar; we also think deflationary drivers of excess debt, aging demographics, tech disruption to fade; QE to MMT, globalization to localization, Wall St. capitalism to Main St populism via Keynesianism, central bank subservience, trade/capital/wage controls) means inflation hedges must be sought by asset allocators via real assets over financial assets, long gold and small-cap value, volatility.”

I concur.


  1. On that note, a good indicator of inflation, the commodity/bond ratio, recently hit 3std oversold. Typically, when the ratio hits these levels it tends to mark an intermediate to long-term bottom (green lines below show past signals). And a rising commodity/bond ratio means rising inflationary pressures.


  1. Here’s some info for you homeowners. BofA points out that the “long term history of the spread between the 30y mortgage rate and the 10y treasury yield. The average is 175 basis points versus 262 basis points today. If the spread normalizes, as it typically does after a refinancing wave, and treasury yields remain relatively stable, this suggests the 2.5% area for the 30y mortgage rate is a possibility in the next 3-6 months.”


  1. DB shared some good charts outlining the bullish gold case over the weekend.


  1. Over the last few weeks, I’ve been pointing out the lackluster sentiment despite the vertical rise in the market. The recent BofA Bull&Bear indicator is case in point. It’s nailed to zero… This bearishness is fuel for the trend up.


  1. From that same BofA report, here’s the notes on investor sentiment/positioning. Summary: Consensus is bear market, no V-shaped rally, and tidal wave of flows into cash…


  1. Finally, here’s the Asset Quilt of Total Returns for the year. We have gold up on top with USTs right behind them. And commodities and MSCI EAFE bringing up the rear. I would not be surprised if this relative performance completely flips by year’s end.

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

The “No Sense” Algorithm


My buddy Chris D. likes to point out that a characteristic of a “Bull Quiet” regime is when the best sell setups fail time after time. That’s what we’re seeing now.  The market is frustrating the bears by buying every dip grinding the market higher in its micro-bull channel with the 3,000 level and 200-day moving average acting as attractors.

Bearish sentiment is providing plenty of fuel for the move. The AAII Bull-Bear spread rarely gets as low as it is now. It’s tough for markets to top when sentiment is this dour.

My base case continues to be that we’re in the early stages of an extended sideways trading range/bear market. The left tail bear case has become less probable due to the extreme willingness of policymakers to flood the market with money. We also have to remain open to the possibilities of a renewed bull market however unlikely — this is not the time for having strong convictions.

While the current rally has been strong, so was the selloff that preceded it. And we’re still well within the norms of past bear market rallies.

Credit has not been confirming the move in stocks. But… while credit leads equities, the lead time can persist for quite a while before a convergence. So while this is something we need to keep an eye on it’s not an immediate sell signal.

@bennpeifert shared this extraordinary chart of DARTs for the largest retail brokerages (DARTs stands for Daily Average Revenue Trades). Apparently, retail investors have been stepping into the breach to buy the market en masse, at record-breaking rates. Maybe that’s where everyone is putting their $1,200 stimulus checks?

That’s usually not the kind of behavior you see near long-term bottoms…

Anywho, if you’re of a longer-term bent and don’t feel like jumping in and out of stocks then you may want to check out bonds and precious metals which continue to catch a strong bid.

Silver is breaking out of a month-long wedge and positioning is favorable to a move higher.

The gold vs. silver ratio recently hit its highest level in history. Perhaps it’s time for the less barbarous relic to play catch up?

There’s also some interesting action going on in some dollar pairs, many of which have been coiling tightly over the last few months.

Check out this chart of the Mexican peso (MXNUSD). I love the fundamentals of this trade long-term. Whether or not this is the start of that LT trade is anybody’s guess but it does look like it’s going to at least see a short-term pop. Relative equity momentum also recently moved in the peso’s favor, which is what you want to see if you’re buying here, which I am.

EURUSD is showing similar action… The chart looks to me like it wants to break higher.

That’s all I’ve got for now. Let’s see how the week ends. Oh, and lastly, if this market has you scratching your head. Give these wise words from Adam Robinson a read.

When someone says, “It makes no sense that…” really what they’re saying is this: “I have a dozen logical reasons why gold should be going higher but it keeps going lower, therefore that makes no sense.” But really, what makes no sense is their model of the world, right? So I know when that happens, that there’s some other very powerful reason why gold keeps going lower that trumps all the “logical reasons.”

…Things that don’t make sense are an Algorithm for finding opportunities. Where do we find good ideas? Look where no one looks. When thing’s don’t make sense, get into the trade.

Things that make sense are often already discounted in the price. The things that make you go hmmm… aren’t, which is why the “no sense” algorithm is quite powerful. Markets are funny like that.

Monday Dirty Dozen [CHART PACK]


The joy of winning and the pain of losing are right up there with the pain of winning and the joy of losing. Also to consider are the joy and pain of not participating. The relative strengths of these feelings tend to increase with the distance of the trader from his commitment to being a trader. ~  Ed Seykota

In this week’s Dirty Dozen [CHART PACK] we look at supply overhangs and market retracement odds before diving into the virus’ second-order economic impact, then we tally up all the many fiscal and monetary actions taken to date, discuss the poor health of our state finances, and end with a deep cyclical value play. Plus more…

Let’s dive in.

***click charts to enlarge***

  1. The market ran into a supply overhang at the end of last week. A supply overhang is a price point where many players had previously accumulated shares before prices moved against them, making them underwater on their positions. It’s their breakeven point or close to where they can dump their holdings at only a small loss and breathe a sigh of relief.

Odds now favor 1-2 weeks minimum of sideways to down action from here.


  1. The NAAIM Exposure Index shows that managers have brought their risk level nearly back up to pre-sell off levels. Nothing like price to change sentiment…


  1. Deutsche Bank put out a report over the weekend talking about some of the second-order economic impacts of the virus; one of them being tourism and what the lack of travel means for GDP. They noted that “According to the UNTWO, a couple of years ago, tourism was directly the source of 9% of all jobs globally — and for every job in tourism another 1.5 jobs are created.”


  1. Nomura has created a number of “lockdown trackers” to show how much of the global economy is in shutdown. Here’s the tracker showing how much of the global populace “should” be on lockdown in accordance with government mandates.


  1. And this one uses alternative data to show what people are “actually” doing.


  1. BofA reported that “The number of countries (> 50 cases) reporting a new high in daily cases in the preceding five days is down from 102 (March 27th) to 49 (April 26th). A risk to monitor is a second wave of new cases as measures to slow the spread of the virus are eased”.


  1. Morgan Stanley detailed the aggressive monetary and fiscal policy to date, writing (with emphasis from me) “Since mid-January, all of the central banks we cover have eased monetary policy. The global weighted average policy rate has declined to below post-GFC lows — rates have fallen by 64bps since December 2019 and 177bps since December 2018. G4 central banks have announced aggressive quantitative easing programs. We estimate that G4 central banks will make asset purchases of ~ US$13 trillion in this easing cycle. The Fed alone will make cumulative asset purchases of ~US$7.8 trillion.”


  1. Here’s a running tally from them of all the global monetary and fiscal measures announced to date (click chart to enlarge).


  1. Thank Zeus the money spigots are on or else we would have seen massive credit cascades. This chart shows a lot of companies are raising a lot of money as IG new issuance crushes the former records.


  1. While at the same time companies are slashing buybacks and dividends. Buybacks have been an important source of equity demand this cycle and so this trend matters a lot going forward. While many people rightly point out that there’s not a one-for-one relationship between buybacks and the market’s performance, it’s the long-term impact to the supply/demand equation for the market where this shows up.


  1. Morgan Stanley pointed out the troubling state of many State finances due to lockdown measures. They wrote, “Joblessness is reducing taxable income, declining retail activity impedes sales tax, weak stock markets stunt capital gains tax revenue, and the decline in the price of oil hurts severance (natural resources extraction) tax revenue.”


  1. There’s always a bull market somewhere as Jimmy Buffett would, I’m sure, say if he were an investor. Natural gas is a case in point. Look out past the near-term futures and the charts look good. Antero Resources (AR) is one of a number of good plays on this theme. Capped downside and LOTs of upside, which is what I like to find in a trade. I’m in the process of doing a deep dive into the space that I hope to share with fellow Collective members later this week.


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

Monday Dirty Dozen [CHART PACK]


People need to have a perceptual filter that matches the way they think. The appropriate perceptual filter for a trader has more to do with how well it fits a trader’s mental strategy, his mode of thinking and decision making, than how well it accounts for market activity. When a person gets to know any perceptual filter deeply, it helps develop his or her intuition. There’s no substitute for experience. ~ Charles Faulkner

In this week’s Dirty Dozen [CHART PACK] we look at pandemics throughout history, bombed-out earnings expectations and what indicators to track to indicate a bottom is in. Then we talk how the bull quiet regime in the SPX is being driven higher by poor sentiment, cover the new highs in gold miners and end with a dirt-cheap retailer gunning for a turnaround, plus more…

***click charts to enlarge***

  1. Deutsche Bank recently published a macabre report comparing the current pandemic to all those throughout history. DB writes that “For covid-19 to become one of the 20 most severe pandemics in history on this measure, global fatalities would have to rise from the 178,000 today to just over 1 million.”


  1. The long-term equity supply and demand model looks like this: Demand = money stock (cash + credit) / Supply = total market cap (number of shares + the price at which they trade). If you’d like to read more on this topic, give this post I put together a while back. This is why bears should look at the chart below and pucker up a bit. The question is will this increase in demand more than offset the inevitable increase in equity supply?


  1. Bloomberg writes “As governments dedicate more than $8 trillion to fight the coronavirus pandemic, a further widening in the gap between rich and poor countries threatens to exacerbate the global economy’s pain. Wealthy nations have delved deep to cushion the blow, but many African and Latin American economies have failed to reach even a few billion dollars in fiscal aid.”


  1. Earnings follow growth and economic growth has fallen through the basement floor. This chart from UBS shows S&P earnings expectations across the indices.


  1. From that same report, UBS points out that EPS tends to trough following a bottom in these three series (1) Consumer expectations (2) ZEW USA growth expectations and (3) Bloomberg’s economic surprise index.


  1. Here’s what those three indicators are doing right now… 1 for 3 so far for the bull case.


  1. My target for the current market rally has been 3,000-3,1000 on the SPX since I turned bullish on March 24th (link here). I think we get there within the next two weeks. That level also coincides with the 200-day moving average (blue line below) and a 0.618 fib retrace.


  1. This rally has been fueled by stretched technical conditions along with bearish consensus/positioning. The fact that AAII Net Bull-Bears hit new lows last week means that there’s plenty of room to run higher.


  1. The chart below shows each time the market has hit 2std oversold over the last 25 years (marked by yellow circles). There’s been 18 such events. Only 5 have gone on to recover to new highs over the following year while the other twelve times saw follow-on losses averaging 19%. The second chart shows the following 12-month path with the yellow line marking the average of the 18 instances.


  1. The gold miners ETF (GDX) closed at 7-year highs last week. And it did so to what I feel like is little fanfare. That could be my bias but I feel like maybe the gold bulls have been quieted by numerous false starts over the years, which makes me think this one has legs. To catch up on the bullish gold case read this post here.


  1. In the hierarchy of markets, credit sits near the top, just below industrial metals. That means that when credit is making moves you need to listen, especially if you’re holding stocks. US high yield credit spreads hit a cycle high last month and have since recovered somewhat. But, they began to turn up again last week. This could be a blip or the start of another move. Only time will tell but make sure you’re paying attention.


  1. There’s a lot of cheap stocks on sale right now. Many of them for good reasons, some of them not so good. Bed Bath and Beyond (BBBY) might be one of the latter. It’s a company we’re digging into at the moment and there’s a lot to like. It’s incredibly cheap. Has a new sharp management team with aligned interests. Lots of cash on the balance sheet to help weather the storm. And the majority of its debt is extremely long-dated.

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

Monday Dirty Dozen [CHART PACK]


While amateurs go broke by taking large losses, professionals go broke by taking small profits. The problem, in a nutshell, is that human nature does not operate to maximize gain but rather to maximize the chance of a gain. ~ William Eckhardt

In this week’s Dirty Dozen [CHART PACK] we look at BAD earnings revisions, COVID-19 temporal arcs, and normalization estimates, before diving into gold’s relationship to volatility, checking out historic levels being hit in the stock/bond ratio, and discussing the bull case for emerging market equities, plus more…

***click charts to enlarge***  

  1. Most anticipated earnings releases this week via @eWhispers: $NFLX $DAL $KO $INFY $HAL $LMT $ALLY $SNAP $T $DPZ $IBM $PM $INTC $LUV $CMG $BIIB $HCA $VZ $BOH $MTB $ONB $SAP $BMRC $CMA $PHG $AXP $ERIC $CBU $KMB $TFC $PLD $SYF $NEE $LII $NDAQ $LLY $SNA $LVS $TRV $LRCX $KALU $EMR $CIT $FITB


  1. Negative revisions to earnings have hit their lowest levels in history. The plus side is that they’ve steadied in recent days and a lot of bearishness is now baked into consensus (chart via Bloomberg).


  1. According to JP Morgan’s conceptual schematic chart of COVID-19 cases, the US along with much of Europe is nearing the peak and will hopefully follow in Korea and China’s footsteps.


  1. But according to Morgan Stanley’s lead Biotech analyst Matthew Harrison, it’s far too early to rejoice. Matthew writes:

“Investors should realize that this won’t be a “normal” re-opening. In COVID-19: A Prescription to Get the US Back to Work, we argue that only after we see (1) adequate surge capacity in hospitals, (2) broad public health infrastructure to support testing for disease surveillance, (3) robust contact tracing to curtail “hot spots” and (4) widespread availability of serology testing (blood tests to see who is already immune to the virus) can the US confidently return to work. We see this happening in waves starting in mid-summer. Unfortunately, we think there will still be a large number of workers not able to go back to work until a vaccine is abundantly available as social distancing cannot be fully relaxed until we have herd immunity (~60% of people vaccinated).”


  1. This chart from Bloomberg shows the 200-day moving average of the CBOE VIX (blue line) along with the performance of gold relative to SPX. Will higher volatility keep real yields pinned down and hence drive gold higher like it did in 08’?


  1. I wrote the longer-term bullish case for gold the other week which you can find here. Gold had a weak close on Friday though and there are decent odds it starts another period of extended volatile sideways-to-down chop again. There is crowded spec long positioning that needs to be shaken out. A close below the 1,650 level would nullify the inverted H&S pattern and put me back on the sidelines.


  1. According to Bloomberg, “U.S. stocks have gone through their biggest bout of weakness relative to Treasury securities in decades… The ratio started this month by closing at its lowest level since 1983 after tumbling 85% from a high in October 2018.”


  1. Invesco shared a similar chart along with the YoY% graph in a recent chart pack (link here). I’m of the opinion that we’re headed for some form of yield curve control here in the US, similar to Japan. The world has too much debt and can’t stomach high real rates. So maybe this ratio is less important in today’s world? Or maybe it’s not. Have to keep an open mind and if there’s one thing that can kill the long gold trade for good it’d be higher rates.


  1. EM stocks have only been this cheap relative to the SPX one other time and that was at the bottom of the 08’ market rout. You know what could cause some mean reversion here? Some big Chinese stimulus… It just so happens that aggregate financing hit a new YoY% high last month and excavator sales in the country — a sign of infrastructure building on the way — hit a new record high in March. This could also potentially cause rates to spike.


  1. This would be great timing since as @MacroCharts recently pointed out:

“Emerging Markets just suffered the most aggressive selling purge on record (like almost everything else).

Flows are starting to turn up again.

Similar inflections marked every Major bottoming phase in 20 years – and preceded ALL of EM’s biggest historic rallies.”


  1. And EM Asia EPS earnings forecasts relative to SPX EPS is inflecting higher. Do we see some catch up soon?


  1. Looking at US indices the odds favor some more gains over the very short-term. But… the SPX is about to run into a large supply overhang in the 3,000-3,100 level (red channel below). And a further push higher will likely drive put/call dma’s back into sell territory. The time to buy was two weeks ago. Not now.

Stay safe out there and keep your head on a swivel!

Monday Dirty Dozen [CHART PACK]


Years of experience eventually teach you that your main battle, always, is with yourself — your propensity for errors, for rationalizing marginal hands into good hands, lack of concentration, misreading other players, emotional eruptions, impatience, and so on. Your opponents are merely dim outlines that come and go. Few of them ever reach the exalted  heights of damage that you can inflict on yourself.
~ Zen and the Art of Poker

Good morning! 

In this week’s Dirty Dozen [CHART PACK] we look at the numbers going into a new earnings season, talk about breadth thrusts and crummy sentiment, and finish with an engine maker that’s 80%+ off its highs but with a good deal of liquidity to survive. Let’s dive in… 

***click charts to enlarge*** 

  1. Q1 earnings season kicks off over the next two weeks. Here’s the most anticipated earnings releases from Earnings Whispers. A number of the big banks are reporting this week. I don’t so much care about the numbers as much as I care about how the market reacts to those numbers. 


  1. Consensus estimates expect S&P 500 revenue growth of 0.7% and EPS growth of -9%. Excluding the energy sector, the growth rate improves to -7.5%. For the last year or so the play has been to fade the overly pessimistic earnings estimates. I have no clue if that’s the play this time around. 


  1. BofA recently pointed out that estimate dispersion is near record levels. Here’s a clip from Bloomberg on what that means, “A measure known as estimate dispersion — how much the highest and lowest per-share prediction varies on the average stock— has soared to near-record levels… making judging company prospects a huge challenge… It’s a throwback to Wall Street’s wilder days, a chance for money managers to rise above each other and the passive investing onslaught that has been their bane for more than a decade.” 


  1. I’d like to point out that after the latest 20%+ bounce in the market and with next year estimates coming down, the market is back to trading at 18.3x next year’s earnings. Not far from its cycle high of 19x. Maybe a tad rich? 


  1. Not only is the SPX back to trading at rich valuations but it’s also trading at a premium relative to its global peers. The SPX / World ex. US forward PE ratio is also back near cycle highs. It’s anybody’s guess how much longer this preference for US assets will last but once the premium cycle turns, the dollar will follow with it. 


  1. I often write that the market isn’t the economy. What matters is how much money is being created and available (demand) relative to supply (total market cap). But… over the long run, for the supply of credit (which makes up the majority of money) to expand you have to have a growing economy (people buying and selling stuff).

This chart from DB shows the relationship between markets and GDP growth. According to the German Bank, based on simple linear regressions, “current US equity prices are consistent with US GDP growth of +0.7% YoY in Q3… more in keeping with a short-lived shallow recession and a quick shaped recovery, than a deep sustained weakness of historic proportion.”  


  1. It’s all quite confusing… That’s why I say to trade the market in front of you, shorten your timeframe, and don’t push your risk. With that said, the market bounce that I said was coming two weeks ago, continues to get positive confirmation from breadth thrusts. SentimenTrader pointed out in a recent note (link here) that there’s been a surge in world markets jumping at least 20% from their lows. 


  1. We saw the largest spike in MACD Buy Signals in the history of the index last week (chart below is a weekly). My case is still for a continued chopping volatile range in the index, for the next couple of months. 


  1. Also from that SentimenTrader report, Combined Hedger Positions are near cycle highs, meaning specs are crowded short. This should serve as further fuel for the bounce higher.


  1. Last week I pointed out the problem with the short-term bear thesis (summary: too popular). @MacroCharts shared this great graph showing the spike in bearish news pieces over the last two weeks. Widespread sentiment like that nearly always marks a bottom, at least a temporary one. 


  1. We’re in a new world with new rules and no-one quite knows what those rules are yet. The Fed is now buying junk bonds — are equities next? — and pumping a record amount of liquidity into the system. Net purchases for G-7 central banks were close to $1.4 trillion in March. That’s 5x the previous peak in April of 09’. 


  1. My watch list for stocks to buy has become incredibly long. One of the stocks at the top of this list is the engine maker Rolls Royce (RR.LN). The stock is down 80% from its 2013 peak and plumbing the lows marked at the bottom of the GFC, when the company’s revenues were less than half what they are now. 

The reasons for the bearishness are obvious: Rolls Royce gets paid by airlines based on how many hours they fly. The company operates a kind of “razor blade” model. It sells its engines at cost and then makes high margined dollars servicing those engines over the course of their lifetime. 

The company recently suspended its dividend for the first time since 1987 in order to shore up its finances. The market is worried about its liquidity but those fears are overblown. The company has roughly 6.7 billion pounds in liquid assets to help see it through the crisis. It’s also about to start a major FCF generating cycle as increased CAPEX costs roll-off from its Trent fan-blade problems. So once this virus slows down and people return to the skies, RR should be well-positioned for a strong run.

Stay safe out there and keep your head on a swivel! 

The “Out Front” Maneuver


You have to recognize that every “out-front” maneuver is going to be lonely. But if you feel entirely comfortable, then you’re not far enough ahead to do any good. That warm sense of everything going well is usually the body temperature at the center of the herd. Only if you’re far enough ahead to be at risk do you have a chance for large rewards. ~ John Masters, Australian oilman, via the book Hedgehogging

That warm sense of everything going well is usually the body temperature at the center of the herd… That’s a great line. Reminds me of the Ralph Wagner bit about inside and outside zebras.

In yesterday’s piece, we talked about where I think we are in this bear market rally and how the near-term path forward is back to being skewed to the downside.

There are a number of things that make me uncomfortable with the short-term bearish take though and I thought I’d share them. Let me walk you through some charts and show you what I mean.

Recession is the consensus take amongst the journos. News stories containing “Recession” have spiked to their highest levels since 09’, right around the time the market bottomed.

Investors Intelligence Bull & Bears Sentiment gauge hardly moved last week. It’s still signaling extreme bearishness (chart via Yardeni).

The 10-day moving average of the put/call composite shows that investors are still buying lots of protection. Markets don’t typically sell off hard when everyone is hedged.

Japanese consumer sentiment hit its lowest level on record this week (chart via Bloomberg).

I look at markets through the framework of a swinging pendulum. Price moves drive sentiment and positioning changes that drive further price moves in a constant positive feedback loop. This goes on until everybody is standing on one side of the boat. Everything that can be priced in, has been. At which point it only takes a marginal piece of contrasting information to swing the pendulum in the other direction.

This is a fractal process. On all timeframes, there are pendulum swings and feedback loops at work.

In early February, investors were tripping over each other to see who could be the most bullish. A little over a month later and we have recession talk dominating the news.

I write all this to say the obvious, that this is a difficult environment. While my fundamental outlook seems to be more bearish than most, it does seem that more sentiment and positioning need to be wrung out in order for the market to make another major advance lower. That means stocks up in the short-term.

Who knows, maybe we just chop sideways from here for the remainder of the year. That wouldn’t surprise me at all. In this environment, anything is possible and we must maintain an open mind.

Pay attention to the herd and watch out for that warm sense

Oh, and one more thing before I sign off.

One of the sentiment/positioning data points that I like to check in on each month is TD Ameritrade’s Investor Movement Index or IMX for short.

According to TDA, “The Investor Movement Index, or the IMX, is a proprietary, behavior-based index created by TD Ameritrade designed to indicate the sentiment of individual investors’ portfolios. It measures what investors are actually doing, and how they are actually positioned in the markets.

“The IMX does this by using data including holdings/positions, trading activity, and other data from a sample of our 11 million funded client accounts.

“We create a monthly sample from all of our retail (individual, self-directed) investor clients who have traded recently. Then we use a proprietary methodology based on the holdings and positions in each portfolio to create an individual score. The process is similar to beta weighting (a method of analysis which considers the percentage of each position in a portfolio to create a view of profit and risk), but instead relies on our proprietary models. The median of the individual scores is the overall, or official, IMX.”

I like it because it’s hard data. Tells you what retail investors are actually doing, not just what they say they’re doing.

Anyways, their March numbers are out. The IMX score “decreased by 19.38%, moving to 4.16, down 1.00 from the previous period and reaching the lowest point in over seven years” according to the release.

On the surface, this is a bullish development. I’m not aware of many instances in which retail investors perfectly timed the market. But the indicator can be a little deceiving because the IMX indicator adjusts for relative volatility of the positions each account holds.

And it turns out that retailers were actually net buyers in the month of March. They just bought lower volatility stocks with the most popular ones being: DIS, BA, DAL, AAL, MSFT, AAPL, XOM, and CCL… Yes, retail is jumping in and buying when there’s blood on the streets. And Carnival cruise ships of all stocks… I mean, come on…

Time To Start Reloading Shorts?


The bear market bounce that I said was odds on two weeks ago in “Bulls Fighting to Save March” has happened. The SPX has jumped 25% off its 3/23 low.

The question now is whether the bounce is: only getting started, midway, or run its course? Since we don’t yet have a crystal ball, we have to look at how past bear market retraces have played out in order to make some inferences.

Going all the way back to the 1920s, the index that would eventually become the S&P 500 has registered 14 bear markets as defined by a 20% fall from a record high. Within these bear markets, the market has staged a bear market rally in excess of 15% on 19 occasions.

Here’s the list of each of these bear market rallies along with their duration in days and their percentage increases from trough to peak.

The median bear market rally lasted 35 days and rose 19%. But within that data, there’s a lot of dispersion. The duration of rallies ranged from just 2 days to over a year, with 1947’s rally lasting 393 days. And while some rallies stalled out at just 16% one bear market retrace ran up as much as 46% in 1929.

This bear market retrace can go either up or down from here. It’s still well within the normal range of bear rallies. At 12 days its duration is on the shorter end while its rise is already above the average bear rally return.

I’m of the opinion that the outcomes are skewed to the downside from here. Maybe we get a dip followed by one more run higher to suck in the last of the bulls. But this move is starting to look heavy.

Most of the major indices are up against their upper Bollinger Bands. See the chart below of the SPX (you can click on charts to enlarge). The next 2-3 days will be the tell… can the market pullback from here and make another push past yesterday’s high? Or has it sucked in enough eager bulls to corral into round 2 at the slaughterhouse?

I’m looking at getting long bonds and long gold if the answer is the latter. I think the 10yr yield is going to zero. I remain of the opinion that the market is still vastly underestimating the destruction that’s occurring right now to the real economy.

15%+ unemployment is in our very near future and that’s a lock. I think it’s crazy that a large swath of the market thinks that we’ll be able to just magically restart the economy once these lockdown phases end and get everybody back to work.

Go and talk to any real business owner and you’ll hear a whole other story.

The selloff that we’ve seen in the market so far is the start of the bear market, not the end. The median bear market lasts 81 days past the initial 20% drop to trough and experiences an additional selloff of 18.41% on average.

So while we could very well run a little higher from here. The odds very much favor another retest if not a full-on break to the downside of this broadening wedge top.

Stay safe and keep your head on a swivel.

Gold: The Least Bad Alternative


Back in March 2019, I wrote a post titled “A Golden Macro Opportunity” discussing the extreme compression in volatility we were seeing throughout the precious metals complex and how this portended an equally extreme expansion in vol and a major move on the horizon.

A little over a month later we saw gold break out giving rise to a new bull trend. 

Since that was roughly a year ago and quite a bit has changed *understatement* I figured now is a good time to update my thoughts on the barbarous relic. 

To kick things off, I’ll quickly summarize my fundamental lens for analyzing gold. 

    • The total size of the “investable gold” market is a pittance relative to the global capital stock (equity + debt). Think $1-2trn vs $250-300trn.
    • Demand is what drives price in this equation, not supply.
    • Since gold is not a productive asset it’s the expected real return of other financial assets (stocks and bonds) that drives its marginal demand.
    • When the expected returns for stocks and bonds is high, gold does poorly. When they’re low, gold outperforms everything else. 

Inflation/deflation and crisis insurance are, for whatever reason, the things most people talk about when looking at gold. But, when it comes to the yellow metal, it’s a matter of relativity. Gold is seen as a steady store of value in times when the expected returns for all other alternatives are low. And since the supply is tiny compared to the potential demand, it doesn’t take much of a change in investing preferences to significantly move the needle. 

What are the expected returns for stock bonds then? 

GMO’s 7-year forecast has US large caps averaging -4.9% real returns and US bonds at -1.8%. 

The expected annual nominal returns for the S&P over the next decade is roughly 1.1%. 

Needless to say, these expected returns leave one wanting.

Enter gold.

Gold has been in a technical uptrend for nearly a year now  (chart below is a weekly). It’s currently working through a big supply overhang in the 1,600-1,800 zone. The move is being helped along by the fall in real yields which we can see in the bottom panel (lower real yields reflect lower future returns).

US 10-year yields are following in the footsteps of its peers who are a tad bit further along in their long-term debt cycles. Japan has led the way and I fully expect we’ll see zero rates across most of the curve and some form of yield curve control before this is all said and done — our mountains of debt all but ensure it. 

This, of course, makes gold that much more of an attractive asset. 

The short-term technical chart is shaping up well, suggesting another leg may be getting underway. It just completed a continuation inverse H&S pattern and closed above the 1,700 level which had been acting as resistance. 

I expect gold will take out its all-time high made in 2011 within the next six months. After that, the sky is the limit.

I have high conviction on this trade over the long-term. However, over the short-term anything is possible if the market were to go into full-on liquidation mode again. I’d step back on the sidelines should the price dip below the right shoulder near the 1,550 level.

Monday Dirty Dozen [CHART PACK]


You don’t really trade the market. You trade your beliefs about the market. ~ Van Tharp

Click here to get the Dirty Dozen straight to your inbox every Monday morning

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at current estimates of the severity of the coming recession, look at how those compare to past downturns going all the back to the 1700s, check-in on liquidity and sentiment before diving into the oil glut and what it means, plus more.

***click charts to enlarge***

  1. The ECRI’s US Weekly Leading Index has been in free fall for 9-weeks. The index, which is a composite of high frequency data points, including: money supply data, stock prices, an industrial markets price index developed by the organization, mortgage applications, bond quality spread, bond yields, and initial jobless claims. ECRI commented on the WLI in a recent post writing

“A recession’s severity is measured by its depth, diffusion and duration, or what we call the 3Ds. In terms of depth, this recession looks extreme, and will likely be the deepest in living memory. It’s also exceptionally widespread in terms of industries affected, so in terms of diffusion, as well, it’s a severe recession…Historically, the vigor of a recovery – at least in its first year – has been proportional to the depth of the preceding recession. But this time around, a sustained “V” shaped recovery is improbable.

“Sure, it might start with a little bit of a “V” as existing businesses get employees back to work. But so many small and medium size firms are going out of business that it might actually require rebuilding rather than restarting business relationships to really get things going. In any case, people may not be so eager to get out there to restaurants and entertainment venues and mingle – not until they feel safe. That could take a while, and will hamper the services side of the economy.”

I concur.


  1. BofA covered the drop in real GDP they’re expecting in a note last week (emphasis by me):

“This degree of weakening in the economy should translate to a significant amount of job cuts which will happen over the next two months. We think that between 16 and 20 million jobs could be lost, sending the unemployment rate to a peak of 15.6%. We also think there will be additional stimulus. The CARES Act is the first step but will likely be augmented by other policies.

“We think that total stimulus will likely equal between 15% to 25% of GDP, in total. We could see additional spending in short order. This will leave growth down a cumulative 10.4% in this recession, exceeding the prior post WWII record of 4% in 2008. This translates into a roughly $2tn annualized decline in GDP (Chart 2). The shock is unlike anything we have experienced before with part of the economy effectively put into an induced coma.”


  1. To give this a little more historical context, here are the largest annual economic contractions in the US going all the way back to 1790 via DB.


  1. There’s a few things we need to keep in mind as we move forward into this sharp contraction (1) the market is forward-looking. It discounts future growth so what is happening now and a few months from now is already baked into the price (2) the economy is not the market. Stocks, can and do, often move in counterintuitive ways as Druckenmiller likes to point out and (3) the duration of this slowdown is the most important variable here. It’s also the one we have the least visibility on at the moment.

One bright spot for risk assets is that financial conditions are the easiest they’ve ever been according to MS’s FCI **Sarcasm**.


  1. I’ve been pointing out over the last two weeks that we’re likely to see a bounce. We’ve already gotten a bit of a retrace and now the question is whether we’ll see any followthrough. If this were a more normal environment (ie, there wasn’t a virus shutting down half the world) I’d be positioning more aggressively for a short-term bounce. But, I’m not fully sure of whether the standard technical toolkit works in this environment, so I’m focusing less on equities and more on other markets where I think the opportunities are more asymmetric.

Sentiment and positioning are making extremes. BofA’s Bull & Bear Indicator hit 0 last week. A level reached only a few other times.


  1. One of the markets I’m paying close attention to is crude. Below is a weekly chart of WTI crude oil futures. Price bounced last week after hitting the $20 round number which also happened to be at its lower channel support line. It bounced as expected and we could see a little more upside but the odds favor a break of the $20 level and a move into the teens…


  1. A lot of fuss is being made over the Saudi/Russia price war and talk of a potential — though incredibly unlikely imo — collective production cut, but it’s the large drop in demand that is really driving the supply glut, as this chart below shows (chart via BBG).


  1. BofA’s commodity team recently talked about the significance and severity of this fast building supply glut in black gold, saying (emphasis by me):

“There is no amount of agreed cuts in supply that can offset the tsunami of physical crude in the market. This has started the debate on storage as the limiting factor on price. While our commodity team coined the term ‘supercontango’ to describe the expected collapse at the front of the curve, no one predicted the scale of the oil market imbalance that is now expected to push oil prices below cash costs.

“This is already happening as although benchmark prices stand at $20 – $25 per barrel for WTI and Brent, realized prices in key producing areas of the US / Americas are already significantly below these levels . Between them, Russia and Saudi produced 20mm bpd before the production deal fell apart on March 6th. At that time Saudi saw COVID-19 as a threat to demand with OPEC calling for additional production cuts of 1.5mm bpd. Russia’s position was that it needed more time to study the impact. Though we are under no illusion that Russia expected this scale of a collapse in demand. But with demand now expected to decline by >25mm bpd there is no amount of production cuts that would offset a storage led collapse in oil prices.”

The play here? Tanker stocks: TNK, EURN, DHT, STNG


  1. From that same report, BofA goes on to note that “Per our discussions with Kayrros, global storage capacity is estimated at just ~2/3rds full. That may be true – but we suggest the forward curve points what is expected to happen next, with regional prices a lead indicator of what can be expected across the industry: spot oil prices that are forced below cash costs to force production shut-ins. Discussions with Rystad suggest the scale of shut-ins may need to be as high as 13 mmbpd, with less than 1mm bpd announced, by global producers to date.


  1. And more from BofA, “There are no precedents for the demand destruction expected to come (>20mm bpd). Within the energy sector refiners are the supply response, and are slashing operating rates to a minimum, which is having severe repercussions across the oil patch. While it’s true that E&P’s have already cut capex, the production response (3-6mths) won’t be fast enough to achieve market equilibrium. The cuts required will need to be deeper with the only option to shut down existing production.

“But shut-ins more than a few hundred thousand barrels is an unprecedented situation, which will have its own chain of events (for context only 100,000 b/d’s were shut-in during the 2014 downturn.) It’s not clear how shut-in’s will play out, but in North America, ‘stripper wells’ (500mbd – 1 million bd) and Canadian oil sands (and particularly crude by rail) are the weak links with operating costs in the $15-20/bbl range, and are therefore the first places to consider.”


  1. It’s too early to start buying the likely survivors of this washout but it’s not a bad idea to put together a list of those with strong balance sheets, good assets, and low production costs. These plays will pay out big once the dust begins to clear and we move into a new world of constrained supply.


  1. Bitcoin (BTCUSD) is at a critical technical inflection point. The below chart is a weekly. The price is currently consolidating on its 200-week moving average (white line), a line that it has respected in the past. It’s also being squeezed by significant resistance in the 7,000-8,000 level (horizontal white line). A break above/below either is likely to signal the start of a new major trend. I lean bullish…


Click here to get the Dirty Dozen straight to your inbox every Monday morning

Stay safe out there and keep your head on a swivel!