More Fuel For the Bulls…   [Dirty Dozen]

It might seem that if you have an edge, the way to maximize the edge is to trade as big as you can. But that’s not the case, because of risk. As a professional gambler or as a trader, you are constantly walking the line between maximizing edge and minimizing your risk of tapping out.~ John Bender

In this week’s Dirty Dozen [CHART PACK] we look at even more evidence in support of the bullish thrust in US equities, we then talk easing financial conditions, confirming internals, a bearish consensus, an N&N Buy Signal, pitch a short USD play, and more… 

1. The bullish breakout in the major US indices continues to follow through. The Qs are now bumping up against their upper weekly Bollinger Band and they’re more than 2std extended from both their 20 and 50-day moving averages. 

This is a positive sign in the long term as it signifies a strong buying impulse, with the backdrop of poor sentiment. But it also means that the market is susceptible to a pullback/consolidation over the short-term here, which would give us a good opportunity to add to our position (chart below is a weekly).

2. I’ve been writing that this is one of the more important charts to be keeping an eye on. It’s the Chicago Fed Adjusted National Financial Conditions Index (ANFCI), which is a composite of indicators that measure three categories (1) risk (2) leverage and (3) credit, which updates weekly.  A reading below zero (horizontal red line) means liquidity is easy and vice-versa for when it’s giving a positive reading. 

Recently, the chart has begun to roll over and trend down from its 12m+range. This means that financial conditions are at their easiest levels in over a year according to the ANFCI. This is NOT bearish… 

3. All of our market internals continue to confirm this bullish thrust. 

4. And the BofA Bull & Bear reading gave its 5th consecutive buy signal last week. 

5. And we saw more confirmatory breadth thrusts last week. SentimenTrader writes: 

“While the sample size is small, whenever 25% of stocks close up 4% or more in a single session, the S&P 500 rallied 100% of the time over the subsequent three, six, and twelve months.”

6. Here’s ST again: “An analysis using sub-industry data over a significantly extended period confirms the bullish outlook, especially when the S&P 500 is in an uptrend like now. If history rhymes, traders should use any short-term weakness to add market exposure.”

We at MO agree.

7. Our Weekly Nervous and number indicator also triggered a 2std low buy signal last week. Past signals are marked in green. This indicator tracks the relative relationship between the Vix and the SPX. As you can see it has a pretty good record at marking intermediate lows in the market.  

8. Here’s the summary with highlights from the latest BofA Global Fund Manager Survey.

9. And the charts of the month from the report. Lots of bond bulls out there…

10. Simon White writing for BBG shared the following last week: 

“Inflation is poised to start reheating soon as it becomes structurally embedded. This makes a sustainable rally in bonds unlikely, especially when US recession risk is receding. 

Consensus is looking for a decline in October headline consumer prices to 3.3% from 3.7% last month, and for core to hold steady at 4.1%. As BBG Economics highlight, the pace of decline in inflation is stalling, or in the case of core it has already stalled. 

We get the same message by separating all of the CPI components into those that are cyclical and those that are structural… The drop in cyclical CPI has driven most o the fall in the headline number in this cycle, while structural CPI has started to turn back up from an historically still-elevated level. Inflation therefore is likely to start rising again as the price growth of structural CPI components becomes entrenched.”

We don’t necessarily agree or disagree with Simon. But this is a potential we’re closely tracking.

11.  Energy is the only sector with positive revisions for both EPS and revenues according to RBC Capital Markets. 

12. I’m looking at getting long CAD (short USDCAD) this week. It’s at the top of its 12m sideways range. Positioning for both large and small specs is crowded short, while its 2s and 10s yield spread oscillator is starting to turn up in CAD’s favor. 

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.