Oil Setting Up For A Big Trend…

“…intuition is our most valuable compass in this world. It is the bridge between the unconscious and the conscious mind, and it is hugely important to keep in touch with what makes it tick. If we get so caught up in narcissistic academic literalism that we dismiss intuition as nonexistent because we don’t fully understand it, or if we blithely consider the unconscious to be a piece of machinery that operates mystically in a realm that we have no connection to, then we lose the rich opportunity to have open communication with the wellspring of creativity.” ~ The Art of Learning

In this week’s Dirty Dozen [CHART PACK], we look at the weak tape in semis, talk tight spreads in credit, discuss the bullish stats in smallcaps, cover a few USD setups, and walk through the important signal in crude, plus more…

1. In a strong healthy bull market the highest beta sectors (semis) within the highest beta market (QQQ) tend to lead the overall advance. That has not been the case for semis which have been trailing the SPY since July. Large negative divergences such as these, tend to precede broader market corrections. But, perhaps this time the weakness is being driven by some profit taking on the AI trade that ran too far, too fast? 

2. Only 27% of semis are trading above their 200 day moving averages. When this number falls below 20%, we tend to see a bottom soon follow in the sector.

3. Credit spreads are at their tightest since July 2007. 

4. But broader liquidity is starting to tighten. Our MO liquidity indicator which has chopped around 90%-100% for most of the year (indicating loose liquidity) has now fallen below 80%, as growth and rate expectations have rerated higher following the election. 

5. These are interesting stats from SentimenTrader which writes “The table below shows those times when more than 20% of Russell 2000 stocks hit a new high and the fewest percentage of stocks traded above their 200-day moving averages. The conclusion was clear-it made no difference. In fact, forward returns in the Russell were exemplary.”

6. And “The Russell 2000 is on track to record its fourth consecutive year underperforming the S&P 500. Since the index’s inception at the end of 1978, its underperforming streak has reached four years only once, in 1997. It underperformed again in 1998, then went on a wicked relative rebound over the following decade.”

7. USDCAD completed its breakout from 2 year sideways range. This is a major compression regime which means we’re likely in for a big trend.

8. But positioning is quite crowded on the short CAD side, so something to keep in mind when sizing an initial position. If this bullish breakout holds, we may see some chop first as some of this positioning gets taken down.

9. EURUSD is nearing the bottom of its 2 year sideways range. I’ll be looking to go long on a strong reversal around this level or short on a confirmed bearish breakout below.

10. EURUSD will soon enter its strongest period of seasonality.

11. Crude oil is in its tightest compression regime since late 2014, as shown here by the width of its monthly Bollinger Band. This signal is directionally agnostic. But it does tell us that a large trend is likely. We’ll play either way and are just waiting for the tape to tip its hand.

12. Here are the rough levels I’m looking for price action to cross in order to get me interested.

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.

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.