Monday Dirty Dozen [CHART PACK]

People need to have a perceptual filter that matches the way they think. The appropriate perceptual filter for a trader has more to do with how well it fits a trader’s mental strategy, his mode of thinking and decision making, than how well it accounts for market activity. When a person gets to know any perceptual filter deeply, it helps develop his or her intuition. There’s no substitute for experience. ~ Charles Faulkner

In this week’s Dirty Dozen [CHART PACK] we look at pandemics throughout history, bombed-out earnings expectations and what indicators to track to indicate a bottom is in. Then we talk how the bull quiet regime in the SPX is being driven higher by poor sentiment, cover the new highs in gold miners and end with a dirt-cheap retailer gunning for a turnaround, plus more…

***click charts to enlarge***

  1. Deutsche Bank recently published a macabre report comparing the current pandemic to all those throughout history. DB writes that “For covid-19 to become one of the 20 most severe pandemics in history on this measure, global fatalities would have to rise from the 178,000 today to just over 1 million.”

 

  1. The long-term equity supply and demand model looks like this: Demand = money stock (cash + credit) / Supply = total market cap (number of shares + the price at which they trade). If you’d like to read more on this topic, give this post I put together a while back. This is why bears should look at the chart below and pucker up a bit. The question is will this increase in demand more than offset the inevitable increase in equity supply?

 

  1. Bloomberg writes “As governments dedicate more than $8 trillion to fight the coronavirus pandemic, a further widening in the gap between rich and poor countries threatens to exacerbate the global economy’s pain. Wealthy nations have delved deep to cushion the blow, but many African and Latin American economies have failed to reach even a few billion dollars in fiscal aid.”

 

  1. Earnings follow growth and economic growth has fallen through the basement floor. This chart from UBS shows S&P earnings expectations across the indices.

 

  1. From that same report, UBS points out that EPS tends to trough following a bottom in these three series (1) Consumer expectations (2) ZEW USA growth expectations and (3) Bloomberg’s economic surprise index.

 

  1. Here’s what those three indicators are doing right now… 1 for 3 so far for the bull case.

 

  1. My target for the current market rally has been 3,000-3,1000 on the SPX since I turned bullish on March 24th (link here). I think we get there within the next two weeks. That level also coincides with the 200-day moving average (blue line below) and a 0.618 fib retrace.

 

  1. This rally has been fueled by stretched technical conditions along with bearish consensus/positioning. The fact that AAII Net Bull-Bears hit new lows last week means that there’s plenty of room to run higher.

 

  1. The chart below shows each time the market has hit 2std oversold over the last 25 years (marked by yellow circles). There’s been 18 such events. Only 5 have gone on to recover to new highs over the following year while the other twelve times saw follow-on losses averaging 19%. The second chart shows the following 12-month path with the yellow line marking the average of the 18 instances.

 

  1. The gold miners ETF (GDX) closed at 7-year highs last week. And it did so to what I feel like is little fanfare. That could be my bias but I feel like maybe the gold bulls have been quieted by numerous false starts over the years, which makes me think this one has legs. To catch up on the bullish gold case read this post here.

 

  1. In the hierarchy of markets, credit sits near the top, just below industrial metals. That means that when credit is making moves you need to listen, especially if you’re holding stocks. US high yield credit spreads hit a cycle high last month and have since recovered somewhat. But, they began to turn up again last week. This could be a blip or the start of another move. Only time will tell but make sure you’re paying attention.

 

  1. There’s a lot of cheap stocks on sale right now. Many of them for good reasons, some of them not so good. Bed Bath and Beyond (BBBY) might be one of the latter. It’s a company we’re digging into at the moment and there’s a lot to like. It’s incredibly cheap. Has a new sharp management team with aligned interests. Lots of cash on the balance sheet to help weather the storm. And the majority of its debt is extremely long-dated.

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.

AK

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.