Your Monday Dirty Dozen [CHART PACK]

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

 

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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).

 

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Parabolic Advances & Two Stocks I’m Buying

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Summary:

    • 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.


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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!

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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.

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Question From Readers: Systematizing Idea Generation

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Last week I received an email from a reader, David. Here’s the text:

I’ve found what you have been doing to be interesting. I’m wondering if you follow any funds to get ideas from. Quite honestly, I haven’t been able to think of any good ideas on stocks in awhile, and it has lead me to aimlessly reading 10-k’s of random companies. Obviously, it’s not a waste of time but I’d like to be more systematic in my approach.

I love when readers reach out to me with questions/comments. It lets me know that readers are engaging with my work, which is incredibly humbling. Please keep them coming.

There are three questions/comments I pulled from this email:

    1. If I follow any funds to get ideas from
    2. Aimlessly reading 10-k’s of random companies
    3. Would like to be more systematic in my [research] approach

I’m going to dive into each one of these and do my best to answer.

The Funds I Follow

I follow a long list of value-oriented investment funds. Most of the funds I follow are small/micro-cap centered with smaller AUM. If my investment philosophy aligns with theirs, I add them to my list.

I don’t blindly follow these managers into their latest ideas. Rather, I use their holdings as guideposts along our off-the-beaten-path. Sometimes there’s stocks I see that I’m already a part-owner in. Other times I find entire sub-sectors worth digging into. Don’t get me wrong. There’s nothing wrong with cloning. But the key is to clone ideas and not philosophies. In other words, it’s fine to clone an individual stock idea. But make sure it goes through your unique investment process (ie, you do your own diligence and the stock checks all your boxes).

Here’s a list of the funds I follow:

I know. It’s a lot. How can I possibly read all those letters? It takes a while, but I do. Some letters I skim until I reach the new ideas section. Other letters I read word-for-word. It all depends on what catches my eye at the time.

Here’s how I categorize all the ideas from one:

    • Create a “Hedge Fund Letter” notebook in Evernote.
    • I save each PDF into the notebook and highlight the sections I want to look into further.
    • Then, in the notes section of the individual Evernote, I list new positions from the letter. This makes it easy for me to skim through each PDF and find which ideas I want to look at.

I encourage you to try a similar approach. It doesn’t have to look exactly like mine. Tailor it to your own preferences and style.

A 10-K Read Is Never Wasted

I’m of the opinion that reading a 10-K is never a waste of time. Even if you don’t invest in the company. Even if you hate their business model. You learned something that you didn’t otherwise know. Sometimes learning what not to invest in, makes it worth the read.

That said, you don’t want to aimlessly read 10-Ks. There needs to be purpose and structure to how you spend your time.

Here’s some thoughts on how to improve 10-K reading time.

1. Create a list of companies you want to study

These can come from screens (we’ll touch on this later) or hedge fund letters you follow, etc. Assign one 10-K to each day of the week (M-F). Read each 10-K on its assigned day.  At the end of the week, whichever 10-K (or company) appeared most interesting, save it for further research.

Lather, rinse and repeat next week.

2. Take notes when you read a 10-K.

You don’t have to physically write them down. They can live in an Evernote note or a Google Doc. Where you store them isn’t important. It’s that you store them. If you’re wondering where to start, Aswath Damodaran has a fantastic YouTube video on how to read a 10-K.

This brings us to our final question … systematizing the research process.

Creating a Research System That Doesn’t Waste Time

I’m not claiming that my research system is the best system. I guarantee it’s not. But I’ve found that it works for me. And in return, it might help others that are looking for a place to start.

The research system combines elements of what we’ve discussed above. Now it’s about putting it on schedule.

The system is also event-dependent. In other words, when quarterly letters roll around, I devote most of my time to reading each letter. In these situations, screening for companies and reading 10-Ks take a back seat.

I’m also assuming the average investor works a standard 9-5 office job and researches in their free time. This won’t be the case for every reader. But generalizing it this way adds greater value.

Screening, Filtering and Fast-Tracking

Every two weeks I run a stock screener. I try to do it on a Saturday morning. It’s not the same stock screen each time, though. But one thing does stay the same. All screens are high-level filters. This means I’m screening on factors like:

    • Market cap/EV
    • debt/equity ratio
    • EV/EBITDA

The screen spits out a lot of names, which is the goal.

On Monday (screen on Saturday), I go through the screen and pick out my favorite/most interesting ideas. At this point, I download the 10-Ks and put them on my calendar to read. Tuesday – Friday. You can read one 10-K a day during your lunch break, or before bed.

On Saturday, after reading each 10-K, I pick my favorites out of the filtered screen to do deeper work. I don’t put a time limit on the deep work. It’s different for each stock. Some ideas take me a few days to flesh out. Others take months.

The TL;DR Summary:

    • Screen on Saturday
    • Filter on Monday
    • Read 10-Ks Tuesday – Friday
    • Filter the 10-K companies down to my favorites on Saturday
    • Spend the rest of the next two weeks (give or take) diving deeper into my favorite ideas

There are a few benefits to this system.

First, it self-allocates the bulk of your time to your best ideas. In other words, you’re not going to spend a lot of time on ideas you don’t like. You pass on bad ideas and channel your time into your favorites.

Second, you’re always looking at new ideas. Remember, this is a game of turning over the most rocks. The more rocks you turn over, the greater your odds of finding a hidden gem.

Concluding Thoughts

This is one process out of a thousand that can work for you. The beauty of investing is you get to find what fits your style. What matches your personality. Tinker with this system and make it your own.

Want to screen once a month? Have at it! Don’t like the idea of using high-level screens? Refine it as much as you want. Make it work for you.

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Your Monday Dirty Dozen [CHART PACK]

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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 

Click here to Check out the Macro Ops Collective

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!

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My Three Stock Picks For The 2020 MO Stock Picking Competition

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Before I get to my three picks I want to remind all fellow Collective members that our 2020 Stock Picking Competition officially kicks off next Monday. The deadline to get your three picks in is by end of day Friday. If you want to play just shoot me an email at alex@macro-ops.com or post your picks to the Comm Center and tag me and I’ll throw them on the board.

The only rules are that the picks have to be stocks (no futures, options, FX). ETFs are allowed as long as they aren’t levered. That’s it. There are no liquidity or country requirements. And the rules of the game are simple: the Operator who’s basket of three stocks (all equally weighted) sees the highest return from Jan 13th through the close of December 31st, 2020, will win.

We haven’t figured out what the prize will be yet but we’ll come up with something good. Maybe some MO swag and an expensive bottle of scotch, not to mention all the bragging rights.

That’s it… Looking forward to seeing your picks!

Now it’s time for me to share my three dark horses. Let me give you fair warning. Two, if not all three of my picks will probably make you dry heave once you see the companies that I’m backing.

I’m fine with that. In fact, that’s the kind of response I’m going for.

Here’s the criteria I used for my selection.

  1. The stocks had to be companies that I’m not already holding for no other reason than I just wanted to make this game a bit more fun. And with the hope that I’d find some new interesting plays (which I think I accomplished).
  2. I wanted picks with crazy asymmetry. Stocks that have the potential to at least double if not 3x or more within 12-months time. I’m playing for keeps here. Either I’m winning this thing or taking a distant last place and eating large helpings of humble pie.
  3. To accomplish the above I needed to find stocks that were either totally and utterly hated or completely and absolutely forgotten, dismissed and disregarded. Preferably, they would have a low float (small supply = higher potential for sharp runs) and a reasonable catalyst for positive change on the near horizon. If they had a really large technical base from which to launch from, even better.

I sifted through hundreds of stocks. My initial list after my first pass through using technicals and a few key fundamental criteria gave me a stack of about 45 tickers. I then dug through the fundamentals for each one of these and was able to kick out the total garbage companies leaving me a solid group of eight stocks.

From this list, I read through transcripts and assigned ratings for technicals and fundies and most importantly, gave a grade to the company’s positive skewness — remember, this isn’t about picking the stock most probable to have a good year but rather about finding three stocks that have the most potential to have an insanely good year (ie, massive convexity).

With that said, I think I accomplished my aims. Now, whether or not they’ll perform or break their legs right out of the gate is to be seen. Either way, I’m excited about the picks. And with that, let’s dive in…

Leju Holdings (LEJU)

If you were to ask someone what was one of the riskiest areas in the global market, they’d very well may say “the Chinese property market”, and rightfully so. Legendary short-seller, Jim Chanos, calls it “the MOST important asset in the world” and not because he thinks it’s a great value.

So, why then did I pick Leju Holdings; a US-listed Chinese ADR that calls itself the leading “online-to-offline (O2O) real estate services provider in China”? Well, I told you I wanted downright disgusting stocks, didn’t I? But, like many things in life, sometimes you have to peer beneath the surface to find that there’s more than what initially meets the eye.

Here’s what I like about LEJU. And why I think it could easily be a 5x’r or more if, of course, it doesn’t end up being a total fraud — I mean, you never really know with these Chinese ADRs.

First off, the chart.

The stock has spent most of its time in a perpetual downtrend since it listed in 2014 after hitting an initial high of $18 a share. At one point, the stock was down over 94% from its all-time highs. For the last three years though it’s been trading in a tight consolidation range.

This is an excellent base… The stock has done nothing for three years. Those who are still sitting in this thing are likely strong hands if they’re willing to hang on through years of… nothing.

(click images to enlarge)

 

What exactly does LEJU do?

You can think of LEJU as a Chinese version of Zillow (ZW). In fact, the two have partnered together (link here). The company has a market cap of $330m, a small float, holds hardly any debt, carries roughly half its market cap in cash, is expected to do $670m in revenues this year which makes for top-line growth of 45% — nearly doubling last years growth rate of 27%. It has positive earnings growing at over 40% YoY, and is trading for approximately half times sales.

CEO Yinyu He, says the slowdown in the property market over the last two years has in-fact been beneficial to their business because instead of developers/owners holding onto units in hopes of price appreciation they’re being forced to move inventory which makes for greater demand for LEJU’s services.

This stock has smooth sailing until $3.50 where it’ll hit some technical resistance. I think it punches straight through that roof and goes to $5+.

Centrus Energy Corp (LEU)

LEU is a US-based supplier of nuclear fuel and services to the nuclear power industry, both in the US and internationally.

The company has a $62m market cap, only 9m shares outstanding with just 4.5m floated (high insider ownership). Management expects to finish out FY2019 with total revenues in the range of $205-230m putting the midrange estimate at low double-digit growth YoY — marking the company’s first year of positive top-line growth in seven years.

The chart makes my mouth water…

The stock is down over 99% from its all-time highs hit way back in 07′. It’s been trading sideways for roughly 6-years and is just now making an attempt to break out of this range and doing so with strong volume.

Management expects to return to profitability this year — they just put in their first profitable quarter in a loooong time.

They recently lowered their LT debt from $247m to $74.3m (a reduction of more than 70%) and extended the remaining maturity all the way out to 2027.

Lastly, LEU recently signed a contract with the DOE to demonstrate the production of high-assay low-enriched uranium or HALEU. If successful, this would mark the first-ever commercial production of this advanced nuclear fuel which one day could be used in advanced next-gen nuclear reactors.

Dan Poneman, LEU’s chief executive, was deputy of the DEO from 09’-14’, so he’s well connected to get these types of deals done.

I’m uber-bullish on uranium’s long-term prospects. Governments are starting to go raving mad for “green” energy. And there’s no feasible future where we lower our carbon footprint without nuclear making up a LARGE part of our baseload energy supply.

Oh… and here’s a screenshot of the Q&A from their last call. Not a single analyst following this one… Totally under the radar.


Deutsche Bank (DB)

No 2020 contrarian stock list would be complete without the perma-bears absolutely favorite whipping boy, Deutsche Bank.

Somehow this company seems to find a way to be at the bottom of every money-laundering and trading scandal in town. Plus, their business has pretty much been stuck in the dumps ever since the GFC.

So why am I adding DB to my stock trio?

Two reasons… (1) DB has fallen over 90% from its 07’ highs. This stock has already passed through the five stages of investor grief and is now totally written off. I think the market has WAY overdone it and think DB is set for a massive rerating (2) all European banks have been in the pooper, largely due to Europe’s anemic economy and… this is is important… the ECB’s negative interest rate policy. One of my big macro thematics this year is that we see further rate convergence between the US and DM/European countries (meaning, US rates will hold steady to lower while other DM rates converge up). This trend is going to rocket boost European banks.

This chart shows that US banks are trading at ALL-TIME highs relative to their European counterparts (yellow line).


Fiscal policy is coming to the EU in the near future. This will not only boost domestic growth but also raise rates and steepen the curve — which is good for a bank’s net interest margin (NIM). Also, I think at some point this year Christine Lagarde looks at Sweden, who just ended their 5-year experiment with the mind-numbingly stupid experiment that has been negative rates, and sees that their economy is doing fine, in fact, better without NIRP and soon follows in their footsteps.

DB’s chart looks great. The stock just broke out of a 6-month bottoming wedge and has clear skies to $15.

DB’s new CEO, Christian Sewing, is doing and saying all the right things and the company is making good progress on their long-term “plan of transformation”.

I think all the bad news and then some is baked into this sauerbraten. It’s time for this turd to shine.

So there you have it. These are my three stocks to ride for the year. If you like ’em, have questions, or think I’ve completely lost my noodles,  just respond and tell me so. I love hearing your feedback. Also, shoot me your picks. I’m excited to see what stocks y’all are amped about.

Oh… and I’ve also added these picks to my book. I’m putting my money where my mouth is. Details for the trades that I executed this morning are below.

Symbol: LEJU Holdings (LEJU)
Size: 100 bps
Entry: $2.40
Risk Point: $2.00
Target: $6+

Symbol: Centrus Energy Corp (LEU)
Size: 100 bps
Entry: $6.69
Risk Point: $4.81
Target: $14+

Symbol: Deutsche Bank (DB)
Size: 100 bps
Entry: $8.45
Risk Point: $7.55
Target: $15+

Your Macro Operator,

Alex

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Your Monday Dirty Dozen [CHART PACK]

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…the poker world is so competitive that if you don’t fully capitalize on every advantage, you’re not going to survive. I absolutely understood that concept by the time I got down to the options floor. I learned more about options trading strategy by playing poker than I did in all my college economics courses combined.  ~ Jeff Yass

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Good morning!

In this week’s Dirty Dozen [CHART PACK] we question whether our bearish bonds stance is still valid. We then dive into what falling yields could mean for other areas of the market and go through some charts of gold, silver, and emerging markets. Let’s dive in…

***click charts to enlarge***

  1. December’s ISM Manufacturing data printed its lowest number in 10-years, remaining in contractionary territory for the fifth straight month. New orders, Production index, and Employment all made new or near cycle lows (the production index squeaked in a slightly lower low in Jan of 16’).

There’s a number of reasons to believe that we’ll soon see this data reverse. For example, Markit’s PMI — which is of higher fidelity — has already bottomed and is trending higher. Also, a number of regional Fed survey data is showing a rosier outlook. Plus, this month was the last month in which the survey was conducted before the tentative trade deal was reached. I’m not expecting a hockey stick rebound like we saw in 16’ but we should see a bottom be put in soon.

 

  1. Treasury yields tend to follow the trends in the ISM. This makes sense as a growing economy (rising ISM) usually drives investors to sell bonds and move further out the risk curve and vice-versa. Considering this, the current divergence between the two is interesting.

 

  1. It’s possible that the bond market is expecting a swift rebound in the ISM or that it’s just been lagging in response and we should expect higher bonds / lower yields in the weeks ahead. This monthly chart of bond futures ($ZB_F) shows bonds recently put in a micro double-bottom and closed at their highs for December.

 

  1. I’ve been bearish on bonds the last few months. One of the reasons why was due to what the metals market was saying with the copper/gold ratio leading yields higher. But this ratio has collapsed in the last few weeks and is on the verge of signaling a new trend lower.

 

  1. Another thing that makes me question the continued validity of my bearish bonds stance is how well they’ve held up considering the market’s low volatility grind higher. When something doesn’t sell-off when you expect it to then that’s a signal in and of itself.

This reluctance of yields to move higher (bonds lower) has been a major tailwind for stocks since stocks and bonds compete for capital and higher yields make bonds more attractive on a relative basis.

 

  1. These low yields have been keeping financial conditions extremely loose.

 

  1. And falling real yields have been driving gold higher (real yields is inverted).

 

  1. This monthly chart of gold shows that it’s making an attempt to break out of its 5-month consolidation zone by breaching the $1,550-1,600 area. A significant level that has rejected it twice before.

 

  1. Falling real yields and rising gold typically go hand in hand with relative outperformance from emerging market stocks. The chart below shows the 5-year change of gold and SPX vs. EEM indices.

 

  1. The gold/silver ratio remains extremely elevated. Historically this is bullish for future returns in precious metals, especially silver.

 

  1. This monthly chart of silver (SI_F) shows the metal trying to break out of its 5-month long bull flag.

 

  1. When looking at miners I care about technicals over everything else since the space is primarily driven by narratives and sentiment. There’s a number of great looking technical setups in gold and silver miners at the moment. Here’s a chart of Silvercrest Metals (SILV) on a weekly basis.


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A Value Investor’s Guide To Stoicism

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You don’t need Stoicism to be a value investor. In the same way you don’t need a killer step-back jump shot to play basketball. Yet if you want to excel as a value investor, you must embrace a form of this ancient philosophical practice.

Think about it.

Ben Graham, Warren Buffett, Michael Burry.

They all share a similar Stoic thread. A principled fabric that once pulled, reveals underpinnings in Epictetus and Marcus Aurelius. These great investors abide by common Stoic ways of thinking. They have an innate ability to detach themselves from an investment idea. A knack for testing ideas through unbiased, unemotional eyes.  A desire to focus on the process of their strategy instead of n=1 results.

I’m not asking you to devote your life to Stoicism. That’s not the purpose of this article. All I’m doing is offering an idea. A tool in your tool-belt. Giving you a new way to view the investment landscape. I’m offering a guide for how we — value investors — can leverage Stoicism into our investment process.

What is Stoicism?

If you’re familiar with Stoic philosophy, it will come as no surprise that most of my research includes Ryan Holiday’s works. According to The Daily Stoic (a site run by Ryan Holiday), Stoicism is (emphasis mine):

“The philosophy asserts that virtue (such as wisdom) is happiness and judgment should be based on behavior, rather than words. That we don’t control and cannot rely on external events, only ourselves and our responses.”

In the same article, Holiday notes that Stoicism teaches four main tenets:

    1. It reminds us how unpredictable the world can be
    2. How brief our moment of life is
    3. How to be steadfast, strong and in control of your life
    4. The source of our dissatisfaction lies on our impulsive dependency on our emotions, rather than logic

You already see the similarities between Stoicism and value investing form. But we’re not there yet.

When people read about Stoicism, they read of Seneca, Epictetus and Marcus Aurelius. These three men are the “Mt. Rushmore” of Stoicism. If you want to learn more about them, check out the following books:

    1. Meditations, Marcus Aurelius
    2. Complete Works of Seneca The Younger, Seneca
    3. The Works of Epictetus, Epictetus

Before diving into the investment application of this philosophy, we must espouse a few common misconceptions regarding Stoicism. Once again, we go to Ryan Holiday for answers.

Common Misconceptions About Stoicism

Holiday outlines three common misconceptions around Stoicism:

    • Stoicism encourages a withdrawal from the world
    • Stoicism promotes a grim and dreary view of life
    • Stoicism means not feeling anything towards others

I can hear the perma-bears rejoice. A philosophy that requires constant pessimism in the face of optimism? Where can they sign up? If any of these misconceptions worries you, I recommend reading Holiday’s post. He expands upon each misconception and offers rebuttals from the three men above.

With our background details out of the way, we can dive right into Stoicism’s impact on investing. We start with (of course), Ben Graham.

Ben Graham Was A Stoic

Benjamin Graham, the father of Value Investing, was a Stoic. Don’t take my word for it. Here’s Graham’s in his autobiography (emphasis mine):

“[I] embraced stoicism as a gospel sent to him from heaven.”

This shouldn’t come as a surprise to us. Graham’s most famous book, The Intelligent Investor, harbors vast quantities of Stoic thinking. Let’s run through a few examples. Page 120-121 (emphasis mine):

“The investor’s chief problem – and even his worst enemy – is likely to be himself. (“The fault, dear investor, is not in our stars – and not in our stocks – but in ourselves” …) [Hence] by arguments, examples and exhortation … we hope to aid our readers to establish the proper mental and emotional attitudes toward their investment decisions. We have seen much more money made and kept by “ordinary people” who were temperamentally well suited for the investment process than by those who lacked this quality, even though they lacked an extensive knowledge of finance, accounting, and stock-market lore”

Graham stresses the importance of proper temperament when investing in markets. And what better temperment to have than a Stoic one? Take this Marcus Aurelius quote for example:

“In your actions, don’t procrastinate. In your conversations, don’t confuse. In your thoughts, don’t wander. In your soul, don’t be passive or aggressive. In your life, don’t be all about business.”

The similarities between Graham’s thoughts and those of the Stoics are plenty.

Here’s another quote from page 203 (emphasis mine):

“The true investor … is free to disregard the current price quotation. He need pay attention to it and act upon it only to the extent that it suits [him], and no more. Thus the investor who permits himself to be stampeded or unduly worried by unjustified market declines … is perversely transforming his basic advantage into a basic disadvantage. That man would be better off if … stocks had no market quotation after all, for he would then be spared the mental anguish caused him by other persons’ mistakes of judgment”

Again we see a common thread. That not letting the market dictate your feelings matters. If you replace the word “market” with “other people” or “society”, you sound like one of the Stoic greats. To back this up, check out this quote from Epictetus (emphasis mine):

“The chief task in life is simply this: to identify and separate matters so that I can say clearly to myself which are externals not under my control, and which have to do with the choices I actually control. Where then do I look for good and evil? Not to uncontrollable externals, but within myself to the choices that are my own…”

Identify and separate what matters. This is powerful.

Think in the context of stock prices. If we can identify that stock prices don’t state the intrinsic value of a business, we can separate them from our control. We cannot control stock price movements.

Knowing that Graham practiced Stoicism, it’s a good bet that Warren Buffett dabbled in similar philosophy. (Spoiler, he did).

Warren Buffett, The Investor Stoic

Warren Buffett’s known for a lot of things. Greatest investor of all time. Avid Coke drinker, etc. But Stoic philosophy isn’t always the first thing that comes to mind. Yet its this Stoic philosophy that propelled Buffett towards investing lore.

A few Buffett-isms off the top of my head are:

    • Long-term mindset
    • Independent Thinking
    • An unemotional view towards Investment Appraisal
    • Intellectual Framework to view the investing landscape

All these ideas — these Buffett-isms — sound like Stoicism. We see more evidence of Buffett’s Stoicism in his forward to The Intelligent Investor (emphasis mine):

“To invest successfully over a lifetime does not require a stratospheric IQ, unusual business insights, or inside information. What’s needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework. This book precisely and clearly prescribes the proper framework. You must supply the emotional discipline.”

Then there’s this quote from Buffett on how to control your emotions (emphasis mine):

“You will continue to suffer if you have an emotional reaction to everything that is said to you. True power is sitting back and observing things with magic. True power is restraint. If words control you that means everyone else can control you. Breathe and allow things to pass.”

Who knows how successful Buffett would’ve (or wouldn’t have) been had he not controlled his emotions. Yet there’s another element, one far greater than Buffett’s ability to control his emotions.

That element is sitting. Waiting. Doing a whole lot of nothing. Buffett expounds on this idea of ‘doing nothing’ in another quote (emphasis mine):

“I insist on a lot of time being spent, almost every day, to just sit and think. That is very uncommon in American business. I read and think. So I do more reading and thinking, and make less impulse decisions than most people in business. I do it because I like this kind of life.”

I love this quote. But what amazes me most about it is its similarity to a quote from Stoic pioneer, Seneca. Here’s Seneca’s take on the same idea:

“Nothing, to my way of thinking, is a better proof of a well ordered mind than a man’s ability to stop just where he is and pass some time in his own company.”

The parallels are striking. It’s evidence of Buffett’s commitment to a Stoic way of life. Even if he doesn’t parade the actual name, Stoicism.

Three Stoic Strategies For Your investment Process

Now you might think, “that’s nice Brandon. But how do I implement these ideas/framework into my investment practice? Here’s three easy steps:

    1. Stop Looking at Stock Prices Every Day
    2. Write a Pre-Mortem Before You Buy a Stock
    3. Get Comfortable With Losing Investments

Let’s break each down further.

Stop Looking at Stock Prices Every Day

Separate what you can control from what you can’t control. You control when you buy a stock. And you control when you sell a stock. You should have both of those prices in mind before placing an order. Christian Ryther of Curreen Capital had a rule that stuck with me. He would check stock prices once a week (Friday). That’s it.

Doing so, he’s always redirecting his focus to the long-term time horizon. I try to adhere to this rule but often break it. With 2020 around the corner, I’ve got a solid candidate for a Resolution.

Write a Pre-Mortem Before You Buy

I got this idea from (you guessed it) Christian Ryther. You can check out his YouTube video on the subject here. In short, a pre-mortem is the act of writing out how your investment will go against you over time. In other words — what would have to happen for your thesis to crumble? Figure that out before you invest a dime into the business.

When you do this, you familiarize yourself with various bearish theses. There’s a sense of comfort in pre-mortems. You know it might not work. You know why it might not work. That’s downside protection.

Get Comfortable With Losses

Stoics adhere to a healthy acknowledgement of their own mortality. Epictetus said, ““I cannot escape death, but at least I can escape the fear of it.” How true is that with stock market losses.

As investors we will experience losses. There’s no way around it. Whether your strategy offers a high slugging percentage or a low one. You will lose money. Applying Stoic thinking towards our losses helps us reckon with that inevitable result.

We can rephrase Epictetus’ quote another way, “I cannot escape market losses, but at least I can escape the fear of it.”

 

website sources: http://www.quebecoislibre.org/15/151215-2.html, http://www.quebecoislibre.org/16/160115-2.html

book sources: Intelligent Investor, Benjamin Graham

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Your Monday Dirty Dozen [CHART PACK]

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For eighteen years I followed the sea, took what it offered. It has brought me shipwreck and success, sorrow, danger, and unutterable happiness. ~ Henry de Monfreid

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Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at the total returns ytd for the major asset classes, then we discuss why stocks performed as well as they did, followed by further talk on stretched sentiment, note some strange action in fund flows, and point out a few good looking chart setups in the gold mining and E&P space. Let’s dive in…

  1. Only two more days left in the trading year. Here’s the report card on the total returns per asset class via BofAML. What a difference a year makes… In 18’ cash was the top performer at 1.8% while every other asset outside of US Treasuries was down on the year. This year, everything was positive with stocks turning in a blockbuster performance with the SPX returning over 30%.

  1. What’s interesting though is that cash — the lowest returning asset this year — happened to be the asset class that investors loved most. Over half-a-trillion dollars flowed into cash this year while investors sold over $160bn net of equities (chart via BofAML).

  1. Why did stocks perform so well this year? Well, investors were expecting the GFC Redux and positioned accordingly but economic armageddon never came. This chart from State Street shows how fund manager’s confidence in equities hit an all-time low in Dec 18’ (over 2 SDs below its 3yr rolling average).

  1. This yearly chart of the SPX going back to 1970 shows the market is about to close on the high for the year, as well as the decade. Newton’s First Law reigns in markets and momentum tends to beget further momentum. This bodes well for next year as the S&P averages an annual return of 11.2% following a year in which it returns over 20% (according to MW).

  1. But more short and intermediate terms of sentiment and positioning suggest we’re likely to see some profit-taking (read: volatility) in the near-term. NDR’s Daily Trading Sentiment Composite shows excessive optimism (chart via @WillieDelwiche).

  1. And Sentiment Trader’s “Core Indicators” are also showing widespread FOMO with 55% of them reading extreme optimism which is the highest level in 15-years.

  1. In addition, January and February tend to be some of the weakest seasonal periods for stocks in the year (chart via Equity Clock).

  1. This great chart from @allstarcharts shows the Europe 600 Index is breaking out to all-time highs, past a resistance level that has rejected it four other times over the last 20+ years. This is important for a number of reasons (1) it’s very bullish for global equities and European equities, obviously and (2) FX markets are driven by speculative flows. Spec flows chase expected total returns. An outperforming European market would be bullish the euro and thus bearish the US dollar (euro makes up roughly 60% trade-weighted dollar basket) (h/t @TihoBrkan).

  1. Most of the charts in the oil and gas space still look like flaming turds. But… there’s a few that have recently broken out of nice technical setups. One of them is GPRK which I recently mentioned here. Another one is Vaalco Energy (EGY). It has zero debt, positive FCF, good assets, strong management, and is selling for dirt-cheap. Chart below is a weekly.

  1. I’ve been expecting more of a pullback in gold and think we may still get one — though I’m bullish longer-term on the yellow metal. With that said, there are too many good looking charts in the miner space to ignore. This weekly chart of Harmony Gold (HMY) is a beaut…

  1. This caught my eye. According to BofAML US equity funds and ETFs saw their largest weekly outflow of the year last week while investors piled into fixed income. I’m not sure how to square this with the sentiment data but it’s definitely strange.

  1. Investors have been moving back into Emerging Markets with 9 out of the last 10 weeks seeing positive inflows into dedicated EM funds. This is a stark change from earlier in the year when investors were selling their EM holdings at a quick clip. This chart from MS shows GEM Fund Managers’ current weighting relative to the MSCI EM index. Malaysia, China, and Taiwan are some of the most underweighted countries which happen to be the charts I’m most bullish on going into 2020. Check out the Malaysia (EWM) chart, it recently broke out of the descending wedge I’ve been pointing out over the last couple of months.

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The Dangers of Intellectual Brothels & “Yes-Man” Syndrome

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A crucial point in an investor’s journey is the realization that they can say “no” more often. It’s at this moment where maturity begins, thoughtfulness resonates and decision-making improves. Saying “no” more often leads to a better portfolio, a less stressful idea generation process and a greater sense of control.

We can also apply these lessons outside of markets. The framework of hurdle rates, IRR and a “too hard” pile add value to our everyday lives.

Outside financial markets, there are two resources we allocate most:

    1. Time
    2. Energy

Yet like any investment, it’s vital we measure the return on our energy and time spent. Saying yes (or, saying no less) leads to low rates of return on our time and energy.

It’s easy to say yes to everything. It’s easy to stretch yourself too thin. In fact, there’s comfort in saying yes all the time. By saying yes to everything, you free yourself from creating a hierarchy of importance. Without saying no, you avoid the arduous task of scrutinizing your own decisions, friends and commitments. Why do you do this? Because it feels good. And how do I know? Because I used to do it all the time.

Saying No: Where Better Investments Happen

I’ll admit it. I was a “yes man”. Starting out as an investor, I couldn’t say no. Every idea looked good. Any company trading below cash caught my eye. I read Ben Graham and Greenblatt. I scoured Buffett’s partnership letters. I tried to apply this knowledge as quickly as I could to as many ideas as I could find.

Stock screeners weren’t filters as much as they were intellectual brothels. I tried servicing my knowledge to any and every company.

There’s an element of wanting to use the knowledge you’re gaining right away. In other words, when I started investing, I didn’t know the power of delayed gratification via the knowledge I was building.

The Consequences of Being a Yes-Man

I jammed round (bullish) theses into square (realistic) scenarios. This is dangerous for two reasons. One, you start abusing a discounted cash flow model to fit your rosiest projections. This is why I’m a huge proponent of Mohnish Pabrai’s Commandment “Thou Shalt Not Use Excel”. An idea should be a no-brainer on the back of an envelope. Not on the third sheet, row AAB of an excel file.

Two, you develop a false sense of security in your own analysis. Annie Duke explains this well in her book, Thinking in Bets. She uses the example of “Nick the Greek”.

Nick the Greek had an interesting poker strategy. He always played seven-deuce. Keep in mind that a seven-deuce is the weakest mathematical hand possible. Let’s pick up from the book (emphasis mine):

“ He fixated on the relatively common belief that the element of surprise was important in poker… And because he played seven-deuce all the time, occasionally the stars would line up and he’d win. Nick the Greek, needless to say, rarely came out ahead.”

There’s a similar error that occurs when investing in low quality ideas. By saying yes to every investment idea, you’re statistically bound to have one profit. But like Nick the Greek, you won’t come out ahead. If you extrapolate the one time you got a bad idea “right” (i.e., profit), you’ll end up losing everything.

I’ve made this mistake numerous times. So much so, I wrote about a particular example last year.

Instead of red-teaming your ideas, you fall victim to confirmation bias. You’re dying to find someone that agrees with your point of view. In doing so, you feel better about your idea. This is dangerous for a couple of reasons.

First, you could miss a data point, financial statement footnote, or headwind that dismantles your entire thesis.

Second, you fail to learn from your mistakes. If all you do is seek confirmatory information, how will you get better at researching the next idea? Without someone to challenge your ideas, you’ll make the same errors and reinforce negative biases.

How I Stopped Saying “Yes”

I made two changes in my investing philosophy that cured me of my “yes-man” syndrome:

    1. I created an “Ideal Company” for my portfolio
    2. I started saying “No”

Most businesses have their ideal customer. This profile dictates how and where they market, how they craft their sales message and their company culture. For example, many retail companies have a customer profile to match the type of person they want wearing their clothes.

An “Ideal Company” description helps you refine your investment process and select only the companies that best match that criteria.

Even better, it’s completely up to you in how you define this “Ideal Company”. Make it match your investment strategy, of course. But besides that, you have total freedom. Prefer companies with no debt? Add that to the criteria. Looking for turnaround companies with share price declines >65% YTD? Add it.

That’s the beauty.

Then, once you have the “Ideal Company”, focus all your time and energy (i.e., your life capital) on finding those specific names.

I Started Saying “No”

This change has had the biggest impact on my investment process. Now, I spend less time researching bad ideas, and more time on my best ideas. Remember, “bad” and “best” are relative terms, and fit within your framework of your “Ideal Company”.

Saying no increases my portfolio hurdle rate, making it harder for new ideas to enter my book. In other words, I’m always making incremental improvements in my portfolio. At least that’s the goal.

If an idea doesn’t resonate with me after reading the Investor Presentation, 10-K or proxy statement; I pass. There’s better ideas out there for me to spend my time on.

And that’s the beauty. The market’s always throwing you pitches. You don’t have to swing if you don’t want to. Like Ted Williams, wait for a pitch in your sweet spot.

A Never-Ending Struggle

After saying all this, I still struggle with saying no. Investing isn’t a job, but a passion. I love finding ideas that challenge my intellect. Ideas that force me to think outside the box.

But that comes at a price.

Sometimes, in the search for the most obscure idea, I forget the real reason for my research. To find a great business that will compound my capital at above-average rates of return.

I don’t say no as often as I’d like. But I’m getting better. And that’s all I can ask of myself. All I want is to say no a bit more each day.

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Your Monday Dirty Dozen [CHART PACK]

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Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected. ~ George Soros

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at the year-to-date returns for major markets, take a step back and review some big-picture macro indicators, talk about the extremes we’re now seeing in bullish sentiment and positioning, and then look at gamma and what they may mean for markets. Let’s dive in…

  1. A year ago this week nearly the entire world was predicting a crushing recession and 08’ style bear market — we were not part of this crowd but were instead saying a major bottom was in. But, I admit, even we didn’t expect the year to turn out as strong as it did. I mean who would have thought a year ago that all stock markets around the world would not only finish the year in green but put in large double-digit gains. Markets are funny like that… The graph below is from KoyFin.

  1. This should be a quiet week for markets with the holidays and all so I thought we’d look at some bigger picture charts to see what 2020 might bring. This smoothed recession probabilities indicator is “a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales.” It’s currently giving its highest reading this cycle but is still well below the level that indicates we’re near recession — meaning, not a major warning but something to keep an eye on. You can find more information on it here.

  1. Heavy Truck Sales, which is one of the critical leading macro indicators I track, just had its worst month-over-month drop this cycle. I suspect this is the result of the weak industrial and energy sector and tightening lending standards in the space.

  1. I’ve noted the weak LEI over the last few months, which is another troubling development. Inflation-adjusted retail sales are still positive though weakening. The consumer has been a critical driver of this recovery so how tight they are with their wallets will continue to be important in 2020. The labor market is still strong though trend growth is weakening. And financial conditions continue to run very easy which is bullish for risk assets.

  1. This chart from NDR and CMG Wealth gives another look at how favorable credit conditions remain.

  1. The underlying technicals of the market are strong but it has become overbought and overloved. Many of our sentiment indicators are at their highest levels since early 18’.

  1. Put/Call 3dma is now 2-Stdev from its average and the SPX’s RSI is in overbought territory.

  1. The NAAIM Stock Exposure Index is at its highest level since June of 18’.

  1. And Extreme Exposure is at its highest level since January 18’ and above the threshold that has consistently preceded turning points in the past.

  1. This chart from Sentiment Trader shows that Gamma Exposure (the sensitivity of option contracts to movements in the SPX) is at historically high levels. They noted that “if the S&P moves +1%, there is a potential 8 billion shares coming to market to push prices lower. That’s the most ever when averaged over the past 3 sessions.”

  1. Here’s a table from them showing the historical market returns following a Gamma exposure / NYSE Volume ratio of over 2.

  1. I tweeted about gold this last week (link here). Its price is at an inflection point, up near its upper channel line and 50dma. My bias is that it soon breaks much lower from here but we may see a false bull trap first with a breakout above the upper channel line. Keep an eye on this one.

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