It’s A Mixed Bag…  [Dirty Dozen]

“You must know the big ideas in the big disciplines and use them routinely – all of them, not just a few. Most people are trained in one model-economics, for example – and try to solve all problems in one way. You know the old saying: “To the man with a hammer, the world looks like a nail.’ This is a dumb way of handling problems.” ~ Charles Munger

In this week’s Dirty Dozen [CHART PACK] we look at the deteriorating short-term backdrop for US equities while arguing why it’s best to stay long until the tape says its time to get out. We then talk about hot job numbers, a pickup in annualized inflation data, a long USD play, and a bombed-out nuclear stock that’s found a bottom, plus more…

1. The market is trading near all-time highs (Qs pictured below) but we’re still seeing a large number of traders trying to short this move. While we’re more cautious due to the high Trend Fragility readings and recent shift in rate cut expectations, we don’t think it’s good policy to fade a strong trend. We’d much prefer to play to the long side, move up stops, and wait for the trend to bend… A move below the recent pivot low (red line) is a good technical inflection.

2. Some components of our Trend Fragility indicator below.

3. One reason we’ve turned a bit more cautious though is that we’re starting to see a growing divergence from our market internals. This is the type of action we see in the lead-up to short-to-intermediate term tops. But it’s important to note that these divergences can go on for weeks before a trend finally ends.

4. Sentix’s “Overall Index”, which tracks technical factors against sentiment and positioning, is also giving its most bearish reading for the US equity market since Nov of 2021.

5.  From Octavio (Macro Ops Quant): Another January Barometer has turned bullish. When the previous year returned more than 15% and January of the current year is positive, 12 out of the 13 have had positive returns with an average return of 16%. (Source: @fundstrat).

Stay in the trend until it bends, then expect a corrective period to wash out all these weak hands, and lastly look for a resumption of the primary trend, which is headed higher this year.

6. This is not what you see when a recession is imminent…. Chart below shows the monthly nonfarm payrolls change in the six most cyclical sectors (chart via BBG).

7. Last week’s hot jobs data helped shift the market’s implied probability of a March cut down to just 22%. It went as high as 90% at the end of December.

8.  We don’t have a strong out-of-consensus view on the short-term path of inflation. But we are closely watching the trends in annualized core CPI where we can see the 1-month change is turning up again (white line).

9.  The DXY has the most bearish speculative positioning out of all the major pairs at the moment and with expectations around US rates shifting we could see a USD pop soon.

10. GBPUSD could trigger a short on a breakdown from its recent sideways rectangle pattern.

11. From Brandon Beylo (Macro Ops Value):

We’re bullish on Mexico over the next 3-5 years, so we’re always looking for new ideas and thematics in that space. GBM recently released its Mexico 2024 Strategy Guide. The PDF includes 15 different investment ideas that are worth researching. If you’re interested in Mexican stocks, this is worth a read.

One idea we like is Consorcio Ara (ARA.BMV). ARA makes affordable housing in Mexico. They trade at 0.3x book value, have consistently bought back stock, and are forming a long-term bullish descending wedge. You can get ARA’s land bank for free and its housing and shopping malls at a discount at the current stock price.

12. NuScale Power Corp (SMR), maker of small modular nuclear reactors, has traded as much as -88% off its post-SPAC listing but the stock has since put in a double bottom, seemingly finding a firm floor around the $2.75 level (chart below is a monthly).

I haven’t looked at this company since its listing but it might be worth a revisit.

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.