Preconditions For A Bottom…

When the time comes to buy, you wont want to… ~ Walter Deemer

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at yields and equity returns, go through the big 3 (sentiment, positioning, technicals), check out the latest BofA FMS findings, and more…

  1. All else equal, rising yields are a headwind for stocks. Fast rising yields even more so. Fast rising yields and richly valued stocks makes for a dangerous coctail as we’ve seen this past week. This chart from RenMac shows that the 10yr’s “Impact” (level + rate of change) on equities is in the 100th %tile which historically leads to low-to-negative forward equity returns.

  1. For a defensible bottom we want to see a few things (1) scared sentiment (2) positioning washout (3) oversold technicals.

The table belows shows we’re seeing signs of 1, with AAII hitting lows last seen during the COVID bear market bottom. And our weekly Nervous & Numb indicator is nearing a major buy signal. But, positioning is still quite long with Specs actually increasing their longs last week and flows and HF positioning still at incredibly stretched levels.

  1. Here’s each sector’s breadth (% of issues trading above/below 50dma). Tech, Real Estate, and Consumer Discretionary are now in deeply oversold territory.

  1. Extremely rich US valuations make things more tenuous.

  1. According to the latest BofA FMS, fund managers haven’t been this light in tech since Dec 08’.

  1. While they have their highest allocations to cyclicals on record

  1. Which is interesting considering growth is slowing and expected to continue to do so, which is typically not good for value and cyclicals… (chart via this great post from @MrBlonde_Macro).

  1. Despite the recent vol and rise in rates, financial conditions remain near historic lows.

  1. Price is always acting under the influence of two opposing forces at all times (1) trend/momentum and (2) reversion to the mean. The Qs are trading 10% below their 50-day moving average. This marks a deeply oversold level and we should see some reversion back to trend over the short-term at least.

  1. Eurodollars have completed a massive H&S top…

  1. Our Summary Predictor tool looks at historical combinations of price patterns and SQN market regimes to give a 10-week projection of average follow-on returns. You’d never trade off something like this alone as it’s just meant to give additional context. But, Natty (bullish) and the Nasdaq (bearish) standout as the markets of note.

  1. I’ve been driving up to Alaska this past week which is why I’ve been MIA. For those interested, the drive is brutally long and the weather (surprise gale force winds and temps that regularly fall below -40℉) make for some interesting driving at times. But, the views make it more than worth it (some pics below from the road). Plus, in the winter you pretty much get the road to yourself, which is great.

I’ll be living and working out of a cabin in Anchor Point for the next 6-months or so. Looking forward to getting plugged back into markets here in a couple more days. Don’t break anything in the meantime!

Thanks for reading.

Stay safe out there and keep your head on a swivel.

Subscribe To Our Newsletter

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.