Insiders Are Bailing Out… [Dirty Dozen]

He that would run his company on visible figures alone will soon have neither company nor visible figures to work with. ~ W. Edwards Deming

In this week’s Dirty Dozen [CHART PACK] we talk about speculators buying the dip in Qs along with that means for this selloff. We then discuss the very high insider sell ratio, look at active fund positioning, walk through Japan fundamentals, and end with an energy play that’s leading to the upside, plus more…

1. Our Trend Fragility indicator maintains its impressive hit rate with the sell signal that was triggered two weeks ago (link here).

2. Large specs added to their longs in Qs last week too, bringing their nominal positioning to 12m+ highs.

This is another sign along with the TF score that we should expect a continued period of chop and volatility with the risks skewed to the downside over the near term, until these hot hands can get shaken out some. My guess is we see the market correct sideways to down for the rest of the month. 

3. But like we said the other week, this correction should be viewed as a retrace within a primary uptrend, meaning we’ll see the market continue to new highs once this pullback is done. The reason for this confidence is due to the intensity of this bull thrust, with 9 consecutive weekly bull bars to new all-time highs (Dow weekly chart shown below).

4. Interestingly, corporate insiders have been selling their stock as if they know something. The chart below shows the ratio of insider sales versus buys hitting new 12m highs (chart via @hmeisler).

5. Here’s BofA’s latest update on active fund positioning. Unsurprisingly, active managers have their highest overweights to the Mag 7 and one of their lowest exposures to value on record.

6. The Mag 7 has been underperforming the SPX for a few months now. We are of the growing conviction that this will be the year that the Mag 7 finally begins to materially underperform the market.

7. We keep beating the drums for select emerging markets, specifically Brazil, Mexico, and Turkey being an additional wildcard but one with considerable upside if the thesis works.

The best time to invest in EM is when you have triple tailwinds in outperforming currencies, bonds, and equities, which is what we currently have in Mexico and Brazil. The chart below from Koyfin shows the strong relative outperformance from EM bonds over the past 6 months.

8. We’ve been talking about the incredibly attractive long-term technical, fundamental, and macro setup in Japan for quite a while now. We may be getting close to another bull run soon. Here’s a weekly chart of the Topix.

9. GMO published a paper over the weekend outlining the fundamental reasons to own Japan. The piece is titled“The Four 4S Behind The Compelling Opportunity In Japan Equities”. Here’s the link and a clip:

We believe Japan is undergoing durable fundamental improvements and lasting change in attitudes toward shareholders. GMO’s 7-Year Asset Class Forecast framework sees Japan small value equities poised to deliver strong absolute returns of 12%, ranking them amongst our highest forecasts. Four “4s” make us particularly excited about small value equities in Japan right now:

  • 4% Real Returns due to Fair Valuation: Japan broad equities look about fairly valued and priced to deliver 4% real returns.
  • 4 New Initiatives: Four recent policymaker initiatives should provide support for company fundamentals and shareholder returns.
  • 4% Alpha from Tilting to Small Value: Active managers who dial into cheap small value stocks stand to capture an additional 4% of returns.
  • 4% Tailwind from Cheap Yen: If the yen reverts slowly back to fair value, USD-based investors stand to pick up a 4% tailwind.

10. And according to GMO, small caps are the market to go fishing in… Japanese small caps currently trade at a discount to market that’s in the 15th percentile of their history.

11. Our yield indicator (red line) continues to diverge higher, suggesting that the reversal in bonds isn’t quite done yet.

 I’d have more conviction if we saw confirmation from copper/gold (blue) and lumber/gold (green). But the last time I looked small specs were getting quite long 10s, which suggests our yield indicator will probably be proven right.

12. Kodiak Gas Services (KGS) is hitting new all-time highs following its IPO at the start of last summer. KGS provides compression equipment natty transpo for the energy sector.

We’re just starting to dig into this name but are impressed by its relative strength. There’s a VIC write-up on them from back in October that you can find here.

Thanks for reading.

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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.