Your Monday Dirty Dozen [CHART PACK]


When any causes beget a particular inclination or passion, at a certain time and among a certain people, though many individuals may escape the contagion, and be ruled by passions peculiar to themselves; yet the multitude will certainly be seized by the common affection, and be governed by it in all their actions. ~ David Hume

***Housekeeping note: Due to a number of requests in recent days, we’ll be opening up enrollment into our Collective this week. If you’re interested in joining our trading/investing group just click this link and sign up. We’ll close this enrollment sometime near the end of the week. And if you have any questions don’t hesitate to shoot me an email.***

Good morning!

In this week’s Dirty Dozen [CHART PACK] we take stock of the technical damage done to the market, look at the historical signs of panic selling and capitulation, before jumping over to China’s latest economic numbers, and analyzing copper’s technical setup, plus more. Let’s dive in…


***click charts to enlarge***

  1. It’s a new month and with a new month, we get new monthly bars! And dear Zeus… was a LOT of technical damage done to many-a charts last week. February formed a bearish engulfing reversal candle on the SPX. This means it’s odds we see 1-3 months of sideways to downwards action. Expect a ton of chop; face-ripping rallies tempting you to believe the bottom is in, followed by gut-wrenching sell-offs. Welcome to the new Bull Volatile regime.


  1. SentimenTrader noted in a post “how this is one of the fastest times the S&P has ever cycled from a new high to at least a 4-month low… Of the 14 times, the S&P has erased so many late buyers’ gains so quickly, they stepped back in 13 times. The 1998 signal suffered some large losses over the next month, but those were subsequently made up over the next couple of months. Several of these ended up morphing into bear markets, but not until 6-12 months later.”


  1. @MacroCharts published a post pointing out the extreme oversold conditions we found ourselves in late last week, showing the Stock/Bond ratio as an example. He wrote “The Stock/Bond ratio hit an 18 RSI in the overnight session. This is an extremely powerful and historic signal.”


  1. Panic selling led to the largest monthly outflow from the SPY ETF in history. A record $27bn in cash was pulled from the ETF…


  1. Bank of America’s Global Financial Stress Index, an indicator which is comprised of 23 measures of financial risk, shot up to its highest level in over a year. If this index stays elevated it will mean bad news for equities going forward.


  1. Jesse Stine sent out a note over the weekend — his letters are always worth a read, here’s the link. One of the many charts he shares is this one of the small caps index (IWC). Jesse writes “This is the MACK-DADDY line in the sand that I’m watching. Small caps are now lower than they were 2 years ago. This chart leads me to believe that we may rebound immediately and may NOT see a 2nd down week.”


  1. SentimenTrader’s Smart/Dumb Money Confidence spread is reverting from extreme levels of complacency.


  1. China’s manufacturing sector contracted sharply last month, plunging to 35.7, its lowest level ever. Bloomberg writes that the poor print was “largely due to virus control measures that have made it hard for workers to travel back after the Lunar New Year, and left factories owners with limited raw materials to restart production.”


  1. Bloomberg Economic’s team downgraded its China’s GDP forecast over the weekend. Their base case is now calling for China’s 1Q GDP growth to fall to 1.2%. It’s slowest growth on record and 3% below their previous estimates.


  1. A fellow Collective member who’s based out of Shanghai wrote in our internal chatroom last week that traffic there had mostly returned to normal after the city had been at a crawl just a week prior. I’ve seen a slight tick up in the traffic and pollution data, but not enough to suggest things are back in full-swing though that could quickly change once the latest data is released.


  1. Copper (HG_F) is still my favorite market to watch for a tell when we’ll get a risk-on bounce. As of right now, the charts look good. The weekly chart is at long-term support and it looks like it wants to put in a complex double bottom off its lower Bollinger Band on the daily.


  1. And finally, here’s a great coronavirus timeline chart from Bloomberg.

***Housekeeping note: Due to a number of requests in recent days, we’ll be opening up enrollment into our Collective this week. If you’re interested in joining our trading/investing group just click this link and sign up. We’ll close this enrollment sometime near the end of the week. And if you have any questions don’t hesitate to shoot me an email.***


Your Monday Dirty Dozen [CHART PACK]


Being prepared, on a few occasions in a lifetime, to act promptly in scale in doing some simple and logical thing will often dramatically improve the financial results of that lifetime. A few major opportunities, clearly recognizable as such, will usually come to one who continuously searches and waits, with a curious mind, loving diagnosis involving multiple variables. And then all that is required is a willingness to bet heavily when the odds are extremely favorable, using resources available as a result of prudence and patience in the Past. ~ Charlie Munger

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at the latest prints of some leading US economic indicators, then talk SPX technicals, some Democratic polling numbers, virus growth, and BofA Global Fund Manager Survey, plus more. Let’s dive in…


***click charts to enlarge***

  1. The US Conference Board Leading Economic Index (LEI), a composite index with a very good track record of predicting recessions, ticked up last month after skirting with negative territory (on a year-over-year basis). The index is now at a new cycle high — the LEI peaks on average 10.5m before a recession.


  1. The Philidelphia Fed’s Business Outlook Survey also came in strong with February seeing its strongest print in two years, beating estimates by more than 20 points. This indicator has a strong leading correlation to GDP.


  1. All is not gumdrops and roses though as both of the above data points come out with a bit of a lag, and therefore, do not reflect the growing impact and increasing concerns over nCov19. Markit’s US composite PMI, however, is a little more up to date and it contracted (sub-50) for the first time since October 2013.


  1. The SPX got rebuffed by the 3,400 level and its upper trading range trend line last week. The odds favor more downside ahead with the February and January lows as obvious next targets. It’s likely we’ll open up the week lower as nCov19 news over the weekend was troublesome. But we should expect choppy action since we’re now in a bull volatile regime and there’s still decent odds that this dip gets bought — it does really bother me how quickly everyone seems to have turned bearish! A close above the 3,400 range would suggest another leg up.


  1. Not only is the market going to have to contend with the nCov19 virus going forward but it’s now also going to have the face the increasing likelihood that Bernie Sanders, a socialist, will be the Democratic nominee. Sanders cleaned house in Nevada and his Real Clear Poll numbers now put him squarely as the favorite.


  1. The latest BofAML Global Fund Manager Survey came out last week. Below are the highlights from the report.


  1. Global fund managers are most crowded into emerging markets, the US, and global tech, while still very much hating on energy where allocations fell to a four year low. BofA notes that “allocation to global equities remains below levels consistent with prior tops (33% today vs. 50% during prior tops)” so there’s that.


  1. Cash levels fell again showing an increase in bullish sentiment amongst fund managers. Their allocation to cash is now the lowest its been since March of 2013 — remember, the BofA FMS should be read from a contrarian viewpoint so a falling cash balance is not a great sign (note their cash levels were at multi-year highs back in October, around the start of the current rally).


  1. And their allocation to global equities just hit a 20-month high (go figure).


  1. These graphs from Morgan Stanley show that while the growth of the virus in China has slowed — if you can trust the CCP’s numbers — it has accelerated elsewhere.


  1. Lv Changshun, an analyst at Beijing Zhonghe Yingtai Management Consultant Co., was quoted in Bloomberg the other day saying that “If China fails to contain the virus in the first quarter, I expect a vast number of small businesses would go under.” Here’s the link.


  1. Frontdoor (FTDR), a home services company that operates a tech platform connecting home warranty holders to home repair/service professionals, has formed a 9-month bull flag (chart is a weekly). We owned this stock previously and took profits on it last Fall. There’s a lot to like about this play and the company has a long runway if they continue to execute well on their growth strategy.



A Record-Breaking Market


Back in October, I wrote a piece for Real Vision titled Market Tops and Archimedes’ Lever. I talked about why I was bullish the market. If you can remember, those four very long months ago, people were very — and I mean very — bearish. I believe I was one of the only bulls on RV at the time.

Here were my concluding thoughts from the report:

We’re moving off the backend of the fiscal impulse into better base effects (the past data in which YoY% is measured against). This means easier hurdle rates going forward.

And finally, auto-demand. It was a one-off event and global demand for car vehicles will improve going forward (the data is already showing this).

So, yeah, spiking repo rates, ISM in free-fall, and inverted yield curves are scary things. But this is the market; there’s always something to fret about. That’s what builds the wall in which stocks climb.

The market is a discounting machine and looking out 6-12 months, things look better than they are today. China will stabilize, the Fed will stay easy, the global manufacturing recession will soon end. And we’ll return to a very low but positive growth world — which just so happens to be the best type of environment for risk assets.

I know that probably reads as complacent head-in-the-sand thinking to some of you. It’s not easy taking this position, which means it’s more than likely the correct one. Markets are funny like that.

Trends are fed by disbelief in the prevailing fundamentals. A market climbs or falls by the incremental adoption of the narrative that spawns around these fundamentals. A bullish trend rises because bears keep getting caught short and forced to cover while former bears and those on the sidelines decide to get long.

The more people buy into a trend the more convincing and pervasive the narrative supporting that trend becomes, creating a feedback loop. Eventually, that feedback loop drives prices to a local extreme. This leads to bulls taking profits and bears testing shorts. Prices swing back in the other direction, and the process begins again. This is the proverbial wall of worry in which the market climbs. A constant swing of the pendulum along a direction trend.

Well… the pendulum has swung quite a ways since last October.

We’ve gone from staring down the barrel of recession to taking out the Jan 18’ all-time record high spread on the U Michigan Stock Market Confidence Survey (chart via SentimenTrader).

We’re also seeing:

    • Options market gone wild
      • According to SentimenTrader “leveraged traders of expiring contracts have never held so much exposure to a rally in stocks… With the surge in call buying, their total outlay has exceeded more than $7 billion in premiums paid each of the last two weeks.” Which is “far beyond anything we’ve ever seen before.”
      • 20-day Put/Call ratio at lows hit only 3 other times over the last 6-years.
      • According to Charlie McElligott “Investors have gotten extraordinarily (and mechanically) long the market via options and the overall index trade to ATH, with Delta across the S&P 500 currently in the 99.5th percentile
      • And Goldman Sachs points out that single stock option notional volumes as a percentage of shares are at 91%. The highest level ever.
    • Short interest in the SPY is at its lowest point since early 2007.
    • Speculative retail plays such as SPCE and TSLA are seeing record-breaking trading volume

And on and on it goes…

So a few things are true right now:

    • Speculation is reaching a fever pitch
    • The SPX is in a buy climax but buy climaxes tend to last longer than anyone expects
    • Bulls are still in control and the path of least resistance remains up, though this could change any day

Long bonds have so far given us a free hedge against our long positions. As long as price stays above the center-line of that wedge (call it the 162’06 level), I’m sitting in my large long position. If it falls below, I’m cutting back to my core holding.

My current base case is that the market is about to enter an extended trading range, perhaps after one more pop up above the 3,400 level. This range will hurt the speculative call buyers by making their calls expire worthless. It’ll also frustrate the bears because the dip won’t be the large one they’ve been hoping for to give them a spot to buy into.

The path of least resistance for the primary trend remains up. It’s important to remember we came into this year with Wall Street strategists the most pessimistic on the stock market in 15-years.

The market has a way of making fools out of those in the consensus. This year will be no different.

Your Monday Dirty Dozen [CHART PACK]


As an alternative approach, one of the traders I know does very well in the stock index markets by trying to figure out how the stock market can hurt the most traders. It seems to work for him. ~ Bruce Kovner

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at positioning in the options market versus direct, then we explore the possibility of the SPX entering an extended trading range, followed by good looking charts in precious metals as well as a few stocks, before ending with fiscal and US confidence. Let’s dive in…


***click charts to enlarge***

  1. There seems to be a major discrepancy in the positioning data. Data for both retail and institutions show that naked positioning is pretty neutral or in the case of this chart from Nomura, slightly net short.


  1. But then you have charts like this which show that for only the fourth time in history, “Investors have gotten extraordinarily (and mechanically) long the market via options and the overall index trade to ATH, with Delta across the S&P 500 currently in the 99.5th percentile” according to Nomura’s Charlie McElligott (h/t Andrew Thrasher).


  1. It appears that all the bullish speculation has moved into the options market where both retail and pros are buying calls as fast as they can get them, while their direct exposure remains limited. I’m guessing the majority of the market came into Oct/Nov when this rally started with an extremely light book due to recession fears and they’ve since resorted to speculative call buying over the last month to try and performance chase. This chart from Goldman Sachs shows that single stock option notional volumes as a percentage of shares are at 91%. It’s highest level ever.


  1. Knowing that there’s been widespread call buying then, like Kovner says above we have to ask ourselves “what could the market do that would hurt the most traders right now”. To which, the answer is a period of sideways chop that makes all these calls expire worthless. The chart below of the SPX shows that it’s up against 2-month resistance, its upper Bollinger Band, and may be forming a sideways trading range — I should point out though that this market has bought into every single little dip, so momentum still favors more upside. This is just one scenario I’m gaming. It becomes less likely should the SPX break above that upper resistance.


  1. Considering the above along with the growing coronavirus fears, I re-upped my position in long bonds again on Friday. The technicals look good and give us a good hedge to our long book. ZB_F is close to breaking out of a bullish wedge at the moment.


  1. And if bonds do rally from here (yields fall) then precious metals should break out of their recent consolidation. The long-term chart (monthly) for silver is really shaping up nicely. It’s put in a double bottom and is forming a long rectangular base. I’d be a buyer if/when it breaks above its recent range.


  1. Precious metals have surprised quite a few people by staying bid in the face of the strong rally in the dollar (DXY). The trade-weighted dollar is comprised mostly of the euro (roughly 60%). In FX, hardly do gaps go left unfilled… This daily chart of EURUSD shows the euro is working hard to close its gap from back in April 2017.


  1. While the short-term technicals don’t look great for EURUSD, the longer-term fundamentals are becoming more supportive of a bottom in the near future. Rate differentials have been moving up in the euro’s favor over the last 14-months. US/DM rate convergence is one of my higher conviction themes this year. It’s one reason why I bought Deutsche Bank (DB) in early Jan.


  1. I don’t typically buy stocks as plays on “events” like the coronavirus. Gilead (GILD) the pharma stock would fit that bill. It has a drug called remdesivir that has been shown to be effective against the nCov class of viruses. I’m considering making an exception here because the technicals on the chart look sharp. It might be a good DOTM candidate to take as a flyer (size position small).


  1. A while back, I want to say early 17’ sometime, I wrote up a report on Fairfax India (FIH.U). It’s a holding company that holds some great assets in India. It’s run by Prem Watsa, the “Canadian Warren Buffett”, and sells at a 30%+ discount to its NAV. Well, despite the continued growth in its NAV, the stock hasn’t gone anywhere. I don’t have a position but I do keep a close eye on it. I think it’s only a matter of time until the market wakes up to the value on offfer here. Chris Mayer wrote about it recently, which you can find here.


  1. There’s growing talk about the need for fiscal stimulus in this world. Bloomberg put together a chart showing the 5-year projected debt profiles of DM countries. The ones at the top are mostly European countries. Seems they have a lot of room to get fiscal should Germany ever loosen its stranglehold on the purse strings.


  1. The recent University of Michigan’s Confidence Report shows that American’s are quite optimistic. According to the report “Net gains in household income and wealth were reported more frequently in early February than at any prior time since 1960” when the school began collective data. If this keeps up going into November, whoever the Dem candidate is will have quite a difficult time usurping the incumbent Trump.



Your Monday Dirty Dozen [CHART PACK]


Try as one might, when one looks into the future, there is no such thing as ‘complete’ information, much less a ‘complete’ forecast. As a consequence, I have found that the fastest way to an effective forecast is often through a sequence of lousy forecasts.  ~ Paul Saffo

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at buy climaxes, wild speculation, some strangely muted sentiment, and positioning data, then get into virus growth rates and finish with a Russian tech giant breaking out of a huge base….


***click charts to enlarge***



  1. I’ve been highlighting the extreme put/call readings for the last few weeks. But here’s the thing about buy climaxes… They last longer than anyone expects them to. Momentum like that which we’re seeing in the FAMG stocks is a helluva force to try and fade. This weekly log chart of MSFT shows that its parabola is now in the straight vertical climb phase. MSFT has climbed the ranks to become the fourth most popular stock held by retail on the Robinhood app, right behind the cannabis stock ACB, Ford, and GE.


  1. Retail speculation is driving a buying frenzy in a number of stocks. The most notable being Tesla (TSLA) which turned over $169bn, that’s billion with a B, in trading the other week (marked by the green line). That’s more than the weekly traded value of MSFT, AMZN, and GOOGL at any time in their history which is saying something since those stocks are 10x the size of TSLA.


  1. Bitcoin (BTCUSD) is looking like it wants to join in on the fun. The cryptocurrency just closed above the 10k level which has previously acted as significant resistance (chart below is a monthly). The odds now favor BTC taking out its 19’ highs in the coming months.


  1. While we’re definitely seeing pockets of bubbly activity in select stocks and amongst some retail investors, the general sentiment is elevated but less so than it was a couple of weeks ago (chart via Nomura).


  1. And if you’re looking at CoT Speculative positioning the numbers are even less impressive. Spec positioning in the SPX remains quite muted while AAII Bulls are back in neutral territory after last week’s di — we should not be surprised if the market rips higher from here…


  1. While short-term traders have been quick to pile into bonds (chart via Nomura).


  1. No doubt the coronavirus is keeping a lid on the bullish fervor somewhat. Here’s the recent growth rates for the virus via @Trinhnomics. While confirmed cases continue to trend higher, the rate at which it’s growing appears to be slowing.


  1. Here’s some Chinese GDP gaming from Nomura given five different scenarios regarding the termination of lockdown measures. From where I’m sitting, the end of February seems a little too on the optimistic side but who knows.


  1. I thought this was an interesting set of charts from Credit Suisse. They show the aggregate free cash flow minus buyback/dividend yield of the SPX ex financials. They note that US corporations often go in the hole (deficit spend) in the lead up to recessions. US companies were briefly in deficit last year but are back to being slightly in the green.


  1. The NYSE stock only advance/decline line (red) is diverging from the SPX (black). Keep an eye on this. It doesn’t mean a top is coming, it just notes a serious weakening of the trend in breadth which makes the market more susceptible to a larger selloff if it continues.


  1. Despite the pockets of crazy in some areas of this market, I’m still finding plenty of opportunities. Take Russian tech giant Yandex (YNDX) for example. It just broke out of the neckline of its 8yr+ inverted H&S. TTM revenues (yellow) and free cash flows (blue) are making new highs and growth is accelerating. The Russian government is about to embark on a multi-year fiscal spending spree. There’s a lot to like here. I’ll be sharing my writeup on the company with Collective members this week.



Your Monday Dirty Dozen [CHART PACK]


History repeats itself – first as tragedy, second as farce. ~ Karl Marx

In this week’s Dirty Dozen [CHART PACK] we look at Democratic Primary probabilities, then give a coronavirus update along with potential regional economic impacts, and end with some monthly and weekly charts on major assets along with a high-probability short setup. Let’s dive in…


***click charts to enlarge***

  1. The Iowa Democratic caucus is today. PredictIt, an online betting market, currently has Bernie Sanders as the clear frontrunner in both the Iowa Caucus and overall Democratic primary; recently overtaking Joe Biden for the top spot. Sanders, a Democratic Socialist and someone who was heavily involved in a Marxist Political Group called the “Socialist Workers Party” in the 80s, has a very good chance of being the Democratic Presidential Nominee. If so, we could very well expect some interesting action in bonds, the dollar, and big tech stocks in the months ahead. Keep a close eye on this one.


  1. The Economic Misery Index, which is a measure of the level of unemployment and the rate of inflation, has a high success rate in predicting whether the incumbent President will be re-elected. It currently has Trump coasting to an easy win, with both inflation and the unemployment rate low. But… it’s a long way between now and November and as Bloomberg recently noted: “expectations for sub-2% GDP growth and a mild uptick in unemployment would nudge the Misery Index into tossup territory.”


  1. Below is the index’s record. According to Bloomberg, “the trend in the index as election day approached accurately signaled voters’ sentiment toward the incumbent or incumbent party. This gauge’s movement in the year preceding an election accurately predicted 75% of outcomes since 1944 and 80% post-Eisenhower.”


  1. I’ve written a number of times over the last few weeks about how the market was ripe for a 5%+ sell-off, due to historically stretched levels in sentiment, positioning, and trend. The market is now down 4% from all-time highs and odds are we see at least one more leg lower. This retracement — I say retrace because we are still firmly in a longer-term bull trend — will likely be exacerbated by the above political narratives as well as concerns over the coronavirus.

This graph from Morgan Stanley shows a timeline comparison between the coronavirus and SARS. China currently has cities with a combined 40m+ inhabitants on total lockdown. Even if the virus’ growth rate peaks soon, we’ll still see a considerable hit to China’s GDP.


  1. This wide-scale lockdown will have cascading effects throughout the global economy. Bloomberg notes the following: “China is the world’s largest exporter of intermediate manufactured products – components destined for use in supply chains across the world. The longer the coronavirus curtails China’s factory output, the bigger the risk of disruption elsewhere. Using detailed OECD trade data, we assess which economies are most vulnerable.”


  1. This monthly chart of the MSCI Emerging Market Index (EEM) shows that EM just put in a failed breakout and complete reversal, forming an engulfing bear candle closing near its lows for the month. Odds are that we see follow through to at least the bottom of the channel, near its Jan 19’ lows.


  1. A key market to watch as the coronavirus situation develops is copper. In the hierarchy of markets — regarding their signaling value — metals sit at the top. China consumes roughly 50% of the world’s copper, which is why the metal recently experienced its worst selloffs in years. Copper should be first to sniff out the all-clear from coronavirus fears. Currently, it’s near its lower Bollinger Band as well as the bottom of its 3-year trading range.


  1. Since China is a large consumer of oil, the crude market is another good tell. Below is a chart of weekly WTI crude (CL_F). Like copper, crude is now at its lower Bollinger Band as well as the bottom of its year-long trading range. It’s now trading at the breakeven cost of production for US frackers. A dip below this range could set up a major buying opportunity.


  1. Long bonds have by far been our biggest position over the last few weeks. So far, this trade has paid out nicely and I expect it to continue to do so for at least a few more weeks. The chart below shows that bond yields saw their steepest decline since August of last year.


  1. Falling real yields have been a great tail-wind for gold which just made a new 6+ year high. The chart below is a monthly and shows that the yellow metal was able to punch through a major area of resistance. It’s now battling the big 1,600 level. The path of least resistance is up.


  1. I’ve received a handful of emails asking about what I look for to gauge when this market selloff might be over. While there’s a number of indicators I track for such a thing, here’s an important one: it’s the percent of stocks trading above their 20-day moving averages. Most selloffs will continue until that percentage falls below at least the 20% level. We still have a bit of a ways to go…


  1. Earlier this month I pointed out the extreme overbought levels in a number of semi stocks, most notably Advanced Micro Devices (AMD). The red circles show every time that the stock has had a monthly candle trade completely above its upper monthly Bollinger Band.

January marked the fourth occurrence over a 25-year period and January’s candle reversed to close exactly on its open which suggests there’s a high probability of major downside ahead. Also, approximately 25% of AMD’s revenues come from within China. Time for a short?



Your Monday Dirty Dozen [CHART PACK]


My brain… it cannot process failure. It will not process failure. Because if I sit there and have to face myself and tell myself, ‘You’re a failure’… I think that’s almost worse than death.

I create my own path. It was straight and narrow. I looked at it this way: you were either in my way, or out of it.

We can always kind of be average and do what’s normal. I’m not in this to do what’s normal.

We all have self-doubt. You don’t deny it, but you also don’t capitulate to it. You embrace it.

Pain doesn’t tell you when you ought to stop. Pain is the little voice in your head that tries to hold you back because it knows if you continue, you will change.

Everything negative — pressure, challenges — is all an opportunity for me to rise.

~ Koby Bryant, RIP

Good morning.

In this week’s Dirty Dozen [CHART PACK] we look confirmed sell signals in equities, revisit the indications of overbought and overloved stocks, and then reiterate our long bond call.

***click charts to enlarge***

  1. Friday’s bearish engulfing candle may have signaled the beginning of a 5%+ correction in US equity indices. Last week’s price action reversed the overthrow from the 4-month rising wedge after briefly passing above the important 3,300 level — which we talked about here. Some buyers came in right before Friday’s close, creating a decent sized tail. Momentum like that which we’ve seen over the last few months typically does not turn on a dime. So there’s a chance we see a small bounce early in the week. But a move below Friday’s low would portend a continuation of the down move which should play out over the coming weeks.


  1. It also happens that we’re moving into the meat of earnings season this week. Here are the most anticipated earnings releases via Earnings Whispers.


  1. Earnings are expected to decline by 0.5% this quarter. Of the 85 companies in the SPX that have reported, 68.2% have beat analyst estimates, above the long-term average of 64.9% but below the prior four-quarter average of 73.5%. So far, there have been 77 negative EPS preannouncements issued by SPX companies and 35 positive EPS preannouncements.


  1. The selloff is likely to extend to over 5% due to (1) the technical overbought conditions of this trend (2) the buildup in complacent positioning (see chart below) and (3) valuation levels which are now a significant headwind. The 3&10 day moving averages of the Call/Put ratio is over 2std’s above its average — one of the most extreme readings this cycle — meaning investors are buying a lot more calls relative to puts. The highlighted red zones mark past instances where the indicator was near current levels.


  1. The SPX’s Forward PE is now 19x. This is the highest valuations seen this cycle, with only January 18’ coming close. Valuations are now an increasingly large headwind for stocks.


  1. Retail has finally decided that now is a good time to become incredibly bullish. AAII Bullish Sentiment just hit its highest levels since January 18’.


  1. And Investors Intelligence shows that “Advisors” last week became their most bullish on stocks since October 18’, right before the large selloff in the equity market.


  1. This chart from Morgan Stanley shows that cross-asset volatility is back near 15-year+ lows. Low vol regimes lead to high vol regimes. And we’re nearing that point where things can’t get much better.


  1. The McClellan Summation index (NASI) triggered a sell signal on Friday. Highlighted red zones mark past occurrences.


  1. Breadth has kept me from turning bearish on this rally but that is now starting to change. The percentage of stocks trading above their 10-day moving averages just crossed below 50%. This is a precondition for a larger sell-off.


  1. The Nasdaq / Bond (QQQ/TLT) ratio recently hit its highest mark since the end of September 18’. My money is betting that we see some mean-reversion here.


  1. Bonds confirmed their breakout from their descending bullish wedge last week (ZB_F, TLT). I recently raised my bond position from 100% of NAV to 200%. Bonds also have copper/gold and positioning in their favor, which I tweeted about last week here.



Your Monday Dirty Dozen [CHART PACK]



I will either find a way, or make one ~ Hannibal



Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at some underlying technicals, discuss the equity/yield relationship, look at private investor flows, review the bullish action out of Mexico, and end with some charts on Japan. Let’s dive in…

***click charts to enlarge***

  1. The SPX remains in a buy climax. It is now trading above bull channels on multiple time-frames. This type of price action typically leads to some profit-taking in the follow-on weeks. The percent of SPX stocks trading above an RSI of 70 is now 37%, the third-highest reading in 3-years. The current bullish advance is stretched but buy climaxes tend to last longer than most expect.


  1. The strength of a bullish trend is determined by the participation in that trend. Last week we saw the highest percentage of stocks making new 52w highs since January 18′. Now, breadth like this is a tricky thing because over the long-term it’s a good sign of underlying strength. But extreme readings can also sometimes portend overdone conditions in the short-term which precede minor pullbacks.


3. This is the most important chart to watch right now, in my opinion. It’s the SPX and the 10-year yield. Low yields have been an incredible tailwind for US equities, unlike in 2018 when yields rose hand-in-hand with the SPX. Bonds have been in a compressed regime (low vol). Compression leads to expansion (trends). I am directionally agnostic on which way yields will break but keep a close eye on them because where they go next will likely determine where the SPX, gold, and dollar all trade.


  1.  Speaking of the dollar (DXY). It’s forming an interesting chart pattern. An argument can be made that the December breakout from its 2-year bull channel was a bear trap. If so,  we’d expect higher prices from here.


  1. Like bonds, I’m mostly agnostic on the direction of the dollar and major dollar pairs at the moment — except for a few idiosyncratic plays such as MXNUSD. But considering how compressed FX vol is, especially in the euro, there’s a real chance we see fireworks in the FX market this year.


  1. This chart from Credit Suisse shows the follow-on moves in EURUSD after its 12-month volatility fell to similar levels.


  1. The “January Effect” is a statistically significant phenomenon in the FX market. It’s a recurring pattern where EURUSD often makes its major high or low point for the year in the month of January. Peter Brandt has written a good overview of it here. This pattern also holds true for the equity market as BofAML explains below.


  1. In addition to the fact that yields have stayed pinned down during this equity rally, another significant difference between today and January 18′ is the lack of private investor / retail participation. You can see this in the data, such as BofA’s GWIM equity flows as well as TD Ameritrade’s IMX. This is important because major tops tend to occur only once retail has gone all-in.


  1. Mexico (EWW) continues to be one of my favorite long-term plays. The MSCI Mexico ETF broke out to new 52-week highs last week.



  1. There’s a lot of great looking charts there. This one of CEMEX (CX), a US-listed Mexican ADR, is a beaut. The stock is breaking out of a base at decade lows following a long multi-year downtrend and it’s trading on the cheap.


  1.  Corporates have been a huge driver of this bull market with US companies buying back over a quarter of the entire market cap since 09′. This financial engineering is a big reason why the US market has outperformed the rest-of-the-world by so much. But now some other players are getting in on the buyback game. The chart below shows that Japan is stepping up its buybacks in a major way. I’m very bullish on Japanese equities for this very reason, as well as a few others (chart via Credit Suisse).


  1.  And then, of course, we have the BoJ which is buying Japanese ETFs at a pace of nearly 1% of the total market cap a year (chart via Credit Suisse).



Parabolic Advances & Two Stocks I’m Buying



    • SPX Technicals
    • Bonds/Gold: At key inflection points
    • Portfolio Update
      • STNG and DHT trimmed by half
      • Took half profits on Luckin Coffee (LK) — up 45%+ since we entered a few weeks ago
      • Added starter positions in Square (SQ) & Grow Generation Corp (GRWG)

Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways — Bob Farrell, Rule Number Four from his 10 Market Rules to Live By.

Winter enrollment for the Macro Ops Collective is now open. This enrollment period will end on January 19th at 11:59PM. If you’re interested in joining our community make sure to sign up by this Sunday! This is the last enrollment till Spring when we’ll be raising our prices by 47%.

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Alex here.

I just wanted to drop a note with some short position updates and a few comments on the market.

The SPX continues to climb higher in its micro-bull channel (chart below is a daily), so far shrugging off the increasing number of indicators suggesting this rally has become too dear (see this week’s Dozen for a refresher).

Trend, momentum, and breadth are still on the bull’s side and favor higher prices in the interim. The onus remains on the bears to show us they can gain back control. It’s a wait and see game. With that said, there are a few divergences worth keeping an eye on.

The first is credit spreads (LQD/IEF) shown below in the top-left chart. They peaked over two weeks ago and have been trending lower. This indicator tends to have a long lead on market action. Also, semiconductors (SMH) are beginning to trade a little heavy but not enough so to call a change in trend.

If we take a look at the underlying breadth of the individual sectors we see some interesting developments. Energy and financials are in the bin. The former is not surprising since energy only seems to trade lower these days, but financials (XLF)?

XLF made new all-time highs this past week, just eking out a spike above its 2007 record (chart below is a monthly). Yet, more members of XLF are hitting new 20-day lows than even energy, giving it the worst breadth of the bunch.

XLF’s advance/decline line peaked in early December and has been steadily trending lower ever since (click chart to enlarge).

A number of the big banks have reported earnings over the last few days and for the most part, have beaten expectations. The take from CNBC along with the other financial news outlets seemed very bullish. This is why I was surprised to see that, when checking my charts, many of these names (BAC, JPM, C, GS etc…) were trading down. The chart below is JPM.

I’m not calling a top in the sector, just making an observation. If you’re heavy long banks it may be a good time to lock in some profits.

Another sector I want to point out is Utes (XLU). The bond proxy is trading like a banshee shot out of hell. It’s showing incredibly strong breadth — the best out of all the sectors — and just broke out to new all-time highs (chart below is a daily).

This brings me to bonds (ZB_F, TLT). Utes often lead the way so this week’s breakout should be taken as a positive sign for bonds, which have held up strong in the face of the incessant rally in equities — I covered the bullish bond and gold thesis in last week’s Dozen.

So now I’d say the odds are in favor of us seeing a bullish breakout from its current descending wedge pattern. Right now we have a 100% long position in bonds but I’ll look to leverage that up to 200% should it break above, preferably on the back of stock market weakness. But… if we see bonds reverse and close back below the 200-day moving average (blue line), then I’ll lower the position back to our Core 25% passive allocation.

Portfolio Update

We cut our positions in our two shipping holdings (STNG and DHT) in half. Nothing has changed to the bullish fundamental outlook but the market has run hard and fast over the last few months and it could benefit from an extended breather over the next few weeks as we head into earnings. We’ll look to add back to these names on further weakness.

We also took half profits on our long position in the Chinese coffee retailer, Luckin Coffee (LK). The stock jumped roughly 50% since we bought in just a few weeks ago, so now seems like a prudent time to take some chips off the table.

You can find my working notes on the company in the Comm Center along with some good on the ground commentary from fellow Collective member, Yang. Just look inside the “Equities” channel for the discussion.

I like LK’s long-term growth prospects and plan to add back to our position; hopefully at lower prices.

We also put on two new starter positions. The first one is in a small-cap agricultural retailer, Grow Generation Corp. (GRWG). And the second is in the tech company, Square (SQ).

I’ll be putting out a longer write-up on both, but let me give you the quick skinny on what I like about these names.

Grow Generation (GRWG) is a fast-growing hydroponic and organic gardening retailer. Yes, it’s a weed play… But unlike the crowded market of branded weed companies that are burning money like it’s 4/20 24/7. GRWG actually has a defensible business, economies of scale, a rock-star management team, and it already produces positive EBITDA.

The chart is a total beaut… GRWG is breaking out of a 7-month long coiling wedge on strong volume (chart below is a weekly).

The company grew its top-line in the high triple digits last year and is selling for under 3x sales.

The weed ETF (MJ) is rebounding off its bottom following a disastrous year in 2019 where it lost over 60% of its value.

I’ve still got more digging to do but at first glance, GRWG looks like it has multi-bagger — or dare I say, dime bag’er… potential?  Okay… I know, I know, I’ll show myself out…

Symbol: Grow Generation (GRWG)

Size: 100 bps
Entry: $4.90
Risk Point: $4.20
Target: $8

The second company needs no introduction. Square (SQ) has been out of the limelight for the last 18-months as its stock has gone nowhere but sideways. Meanwhile, the long-term fundamental outlook for the company has continued to improve (chart below is a weekly).

Why do I like this stock?

There’s a few reasons… (1) I think Square’s CEO, Jack Dorsey, is the most underrated and impressive CEO in tech (2) the other day I was on google maps looking up the number to my barber when I noticed that you can now book appointments directly in g-maps — as long as the retailer has Square tech. It took less than 2 seconds. For someone who loves small efficiency gains, this was like having another Christmas. I can’t help but think this will be huge for the company and (3) this company has created an amazing number of products now and is uniquely positioned to dominate the PoS relationship with retailers going forward + its Cash App is grossly underappreciated. Did you know it did $159m in revenues last quarter (exl. Bitcoin) which makes for 115% YoY growth? The Cash Card is an incredibly positive skewed wild-card that I don’t so much mind having thrown in with the rest of the business.

Like GRWG, I still have some digging to do. But the technicals look great. It looks like it’s itching to break out, so I went ahead and put this starter position on while I do my due diligence.

Symbol: Square (SQ)

Size: 100 bps
Entry: $70.21
Risk Point: $65.00
Target: $110

I’ll be back at the end of the week with more updates.

If you’ve got any questions, just hit me up in the Comm Center.

The Macro Ops Collective Now Open

Winter enrollment for the Macro Ops Collective is now open. This enrollment period will end on January 19th at 11:59PM. If you’re interested in joining our community make sure to sign up by this Sunday!

Click here to enroll in the Macro Ops Collective

Every purchase comes with a 60-day money back guarantee no questions asked. That means you have a full two months to immerse yourself in our community, read through our research, see how we trade, and go through a huge library of educational material before committing your money. If the material isn’t a good fit, just send us an email and we will promptly return your funds in full.

Enrollment in the Collective will not open again for another 3-months and we will be raising our prices by 46% this next go around. So if you’re at all interested make sure to take advantage of this opportunity and check it out. Looking forward to seeing you in there.

Your Monday Dirty Dozen [CHART PACK]


Since the mid-1980s, my mantra for this process is ‘strong opinions, weakly held.’ Allow your intuition to guide you to a conclusion, no matter how imperfect — this is the ‘strong opinion’ part. Then — and this is the ‘weakly held’ part — prove yourself wrong. Engage in creative doubt.

…Eventually, your intuition will kick in and a new hypothesis will emerge out of the rubble, ready to be ruthlessly torn apart once again. You will be surprised by how quickly the sequence of faulty forecasts will deliver you to a useful result. ~ Paul Saffo 

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Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at numerous signs of glaring complacency, over positioning, and excessively silly bullish sentiment in the market. Let’s dive in…

***click charts to enlarge***

  1. The SPX briefly sold off last week on Iran war hysteria only to rebound perfectly off of the lower line of its 14-week micro bull channel, putting in a new weekly all-time closing high. Its next test will be the 3,300 level and should it fail and break below the bull channel we should expect a sell-off at least down to its next major area of support which is in the 3,100ish range.

As I’ll show, sentiment and positioning are at extreme levels. This makes the market susceptible to a sizable correction (5%+) in the near future. But, breadth and technicals are still mostly intact and momentum is on the market’s side for higher prices. I suspect we could see a final buy climax following the signing of the US-China phase 1 trade deal this week. Takeaway: Now’s not the time to be chasing higher. Start hedging downside risk but wait for the market to confirm bull move is over before attempting to short. And don’t overreact, this selloff should set up some excellent buying opportunities.

  1. SentimenTrader tweeted out the following message and chart “Last week, y’all bought to open 21.6 million speculative call options. That’s the most *ever*. Your previous record was 19.7 million during the week of Jan 26, 2018. Your total bullish / bearish volume was the most since March 2000. So…wow.”

  1. Over the last two weeks, I’ve been writing about the incredibly stretched levels in put/call ratios. This last week @MacroCharts shared the following in a blog post noting the same “Above, the 50-day Put/Call Ratio (inverted) has dropped to 0.56, among the most extreme overbought readings in 20 years. Remember this is the same indicator I discussed in November – when people were pointing to a 1-day overbought Put/Call reading and saying markets were euphoric. They weren’t. But now they certainly look that way.Link to the post.

  1. The CTA’s are going all in… Read the following from Nomura, “It appears to us that the foremost concern in speculators’ minds right now is not the short-term risk of herding, but rather the risk of their managed funds underperforming the benchmark indices… we estimate that trend-chasing CTAs are adding to their aggregate net long position in S&P 500 futures at a furious pace. We think that this sprint to chase the market’s upward momentum is giving rise to a systematic market melt-up. We estimate that a hefty 47% of CTAs’ long positions in S&P 500 futures were acquired in the brief time since the beginning of December, and therefore break even (on average) at an S&P 500 reading of about 3,245, which is considerably higher than the average entry point for positions acquired earlier on.”

  1. This chart from Deutsche Bank shows that total equity positioning is “at the top of its historical range and in the 96th percentile”.

  1. Even Risk Parity funds have gone all-in on the equity ramp up. RP beta to the SPX is at its second-highest level this cycle, with only Jan 18’ exceeding it (chart from DB).

  1. Nomura’s global equity sentiment index is roughly 1.5 SD’s above its 1-year rolling average.

  1. Another interesting development is the widening spread between the SPX’s implied and realized volatility. This means traders are starting to bet on a pop in vol. The white circles note the prior three times the gap between implied and realized volatility reached these levels.

  1. This seasonality chart from Nomura shows that we’re entering a historically weak period for stock market returns over the next two weeks.

  1. I don’t know about you but this makes bonds — which have been holding up surprisingly well, considering — a good looking trade here. It also happens to be that CTA’s have near-zero exposure to them and positioning is extremely short (charts via DB).

  1. This is a cool chart from BofAML showing the number of months that a stock has made it with a market cap exceeding 4% of the S&P 500. MSFT is currently at 8 months and AAPL at 3. Another thing to point out (there wasn’t enough space in this week’s Dozen to do so) is that there’s a number of stocks trading completely above their upper monthly Bollinger Bands. Not only is this usual but it tends to not last very long, often marking intermediate buy climaxes. AAPL and the semi index (SOX) are two current examples.

  1. Now, THIS is a great chart from BofAML. Real assets are trading at ALL-TIME LOWS vs financial assets. Do you think this trend will persist or are we nearing the turn?

Special Announcement: The Macro Ops Collective
Now Open.

Winter enrollment for the Macro Ops Collective is now open. This enrollment period will end on January 19th at 11:59PM. If you’re interested in joining our community make sure to sign up by this Sunday!

Click here to enroll in the Macro Ops Collective!

Every purchase comes with a 60-day money back guarantee no questions asked. That means you have a full two months to immerse yourself in our community, read through our research, see how we trade, and go through a huge library of educational material before committing your money. If the material isn’t a good fit, just send us an email and we will promptly return your funds in full.

Click here to enroll in the Macro Ops Collective!