Did Small-caps Just Bottom?

“Early in life, I had noticed that no event is ever correctly reported in a newspaper.” ~ George Orwell (h/t Jesse Stine)

Good morning! 

In this week’s Dirty Dozen [CHART PACK]  we take a look at the conflicting data of horrid breadth and new all-time highs and then dive into similar past instances to see what the forward returns looked like. We discuss the buyback outlook and low costs of capital, go through the latest earnings guidance and margin trends, and finally end with a long setup in crypto. Plus more… 

Let’s dive in. 

***click charts to enlarge*** 

  1. The semiconductor index is nearing the top of its 7-month sideways trading range. Semis are typically a good lens on general risk sentiment and often provide a lead on the broader market. 

This is why I’m watching not just its price but also its breadth. A continued deterioration in its breadth profile will tip us off that there’s more market volatility ahead. Conversely, if we see semis breakout to the upside here we’ll want to see breadth confirm. 


  1. Qs closed at all-time highs on Friday but breadth hasn’t followed the tape. It’s at levels that typically come after larger corrections, not all-time highs. 


  1. We see a similar situation in small caps, where breadth is also incredibly weak and at levels that typically coincide with bottoms following larger corrections. 


  1. I ran a backtest to look at past instances where breadth was this weak but the index was still above its 200-day moving average. Yellow dots below mark past occurrences. 


  1. Interestingly, this tends to be a positive signal. Out of 22 instances, 68% saw positive returns over the following 20 trading days with an average return of 7.25%


  1. SentimenTrader recently shared this chart showing the correlation between small-caps and technology has plunged to levels only seen one other time over the past twenty years. 


  1. Their backtest shows that this also tends to be on average a bullish signal. 70% of past occurrences over the last 90-years saw positive returns over the following month, and 80% over the next 2 and 3 months. 


  1. We’re still clearly in an early to mid-cycle market. And there are plenty of strong tailwinds to keep driving things higher over the next couple of years. Buybacks being one of them. These charts from JPM show that our Most Important Fundamental is alive and well… (charts via JPM)


  1. In addition, planned CAPEX is at its highest level in decades — CAPEX is a critical component of earnings growth as per the Levy-Kalecki equation. This is supported by an easy Fed policy which is keeping interests costs low for US corporates (charts via JPM). 



  1. This graph from GS shows sector valuation relative to the market and its past.  


  1. 11It looks to me like Bitcoin, and likely crypto in general has put in a tradeable bottom. BTCUSD has had every chance to break down but hasn’t. Its 30k significant level has held. I started buying a small position this past week. 

Like all things trading-related, this is a weakly held opinion. I’d gladly change my mind should the price reverse and break lower here. 


  1. If you don’t have access to a crypto exchange, GBTC continues to trade at an incredibly steep discount to NAV. 

Thanks for reading.

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

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Brandon Beylo

Value Investor

Brandon has been a professional investor focusing on value for over 13 years, spending his time in small to micro-cap companies, spin-offs, SPACs, and deep value liquidation situations. Over time, he’s developed a deeper understanding for what deep-value investing actually means, and refined his philosophy to include any business trading at a wild discount to what he thinks its worth in 3-5 years.

Brandon has a tenacious passion for investing, broad-based learning, and business. He previously worked for several leading investment firms before joining the team at Macro Ops. He lives by the famous Munger mantra of trying to get a little smarter each day.


Investing & Personal Finance

AK is the founder of Macro Ops and the host of Fallible.

He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

With Macro Ops focused primarily on institutional clients, AK moved to servicing new investors just starting their journey. He takes the professional research and education produced at Macro Ops and breaks it down for beginners. The goal is to help clients find the best solution for their investing needs through effective education.

Tyler Kling

Volatility & Options Trader

Former trade desk manager at $100+ million family office where he oversaw multiple traders and helped develop cutting edge quantitative strategies in the derivatives market.

He worked as a consultant to the family office’s in-house fund of funds in the areas of portfolio manager evaluation and capital allocation.

Certified in Quantitative Finance from the Fitch Learning Center in London, England where he studied under famous quants such as Paul Wilmott.

Alex Barrow

Macro Trader

Founder and head macro trader at Macro Ops. Alex joined the US Marine Corps on his 18th birthday just one month after the 9/11 terrorist attacks. He subsequently spent a decade in the military. Serving in various capacities from scout sniper to interrogator and counterintelligence specialist. Following his military service, he worked as a contract intelligence professional for a number of US agencies (from the DIA to FBI) with a focus on counterintelligence and terrorist financing. He also spent time consulting for a tech company that specialized in building analytic software for finance and intelligence analysis.

After leaving the field of intelligence he went to work at a global macro hedge fund. He’s been professionally involved in markets since 2005, has consulted with a number of the leading names in the hedge fund space, and now manages his own family office while running Macro Ops. He’s published over 300 white papers on complex financial and macroeconomic topics, writes regularly about investment/market trends, and frequently speaks at conferences on trading and investing.

Macro Ops is a market research firm geared toward professional and experienced retail traders and investors. Macro Ops’ research has been featured in Forbes, Marketwatch, Business Insider, and Real Vision as well as a number of other leading publications.

You can find out more about Alex on his LinkedIn account here and also find him on Twitter where he frequently shares his market research.