Small-caps Set To Sizzle… [DIRTY DOZEN]

To be successful, you need leisure. You need time hanging heavily on your hands. ~ George Soros 

In this week’s Dirty Dozen [CHART PACK], we look at the worst bond returns in over 200-years, cover more reasons to be bullish on small-caps long-term, discuss the key thing to watch for risk-on to continue, check in on our ETHUSD long trade, talk about why US large caps are still grossly overvalued, and peek in on what stocks retail are buying, plus more…  

**Note: Enrollment into our Collective kicks off today and will be running until the end of the week. The Collective is our full-kit soup-to-nuts service that provides research, theory, and a killer community that consists of dedicated traders, investors, and fund managers from around the world. We’ve been told that there’s nothing else like it on the web. If you’d like to tackle markets with our group (whom, I should note, has been having a great year in markets), then just click the button below and sign up. And, as always, don’t hesitate to shoot me any Qs!***

  1. US Treasuries annualizing 23% loss YTD, worst since 1788 & 2nd straight annual loss… last time 3 straight years of US government bond Treasuries… never; 250 years of history say US Treasury returns up in 2023. BofA Flow Show summary with highlights by me. 


  1. Secular shift points to outperformance of small vs large caps… 


  1. We discussed the absolute and relative value that small-caps offer earlier this month (link here). 


  1. Historically, when smallcaps have traded at a forward PE of 10x, they’ve seen double-digit annualized returns over the following decade.


  1. Out of the major US indices, R2K has the best looking monthly setup. Strong close on its highs. Potential double bottom in place. A monthly close above 1,900 would be a significant risk-on signal. 


  1. But we’re playing a counter-trend rally here and the key thing to watch continues to be yields. The breakdown in bonds killed the last rally in stocks and they’ll do the same here if they can’t hold their recent floor.


  1. Here’s a great chart from BBG’s Cameron Crise which shows a time series of his “hopes-and-dreams” indicator. This indicator “represents the proportion of equity-index valuation not explained by book value or the net present value of the next three years’ earnings”. A lower reading equals a more reasonable valuation — less hopes and dreams baked into the price. 

The SPX is represented by the white line which remains considerably higher than other major markets. 


  1. One measure I like to occasionally check in on is TD Ameritrade’s IMX as it shows hard positioning data. The IMX tracks the “holdings, positions, trading activity, and other data from a sample of 11 million funded client accounts.”  Here’s some interesting highlights from their September report.

“Investment exposure in TD Ameritrade client accounts decreased last period…TD Ameritrade clients were, however, net buyers of equities in September. Despite every S&P sector trading significantly lower during the period, the sector mix showed buying interest in every S&P 500 sector except for Health Care. The buying interest was particularly strong in the Information Technology sector, which was down nearly 15% during the September period.”

The most popular names bought amongst TDA clients were: TSLA, AMZN, GOOGL, MSFT, AAPL, NVDA, and AMC. The names that were most sold were: XOM, NFLX, BP, MS. <facepalm>


  1. Strong private balance sheets suggest the Fed may have a tougher time hitting the brakes on the economy, which means rate hikes might need to go on for longer than expected. 

Via the WSJ “Household, nonfinancial corporate and small-business sectors ran a surplus of total income over total spending equal to 1.1% of gross domestic product in the quarter of April to June, according to economists at Goldman Sachs Group Inc. Using a three-year average, the measure is healthier than on the eve of any U.S. recession since the 1950s.”


  1. We spent the last few weeks pounding the table on the setup in ETHUSD (a major compression regime). The pair broke out last week and ran fast. We’ll look to add to our position on pullback reversals as long as the FOMC doesn’t kill the risk-on rally this week and bonds stay bid. 


  1. Bridgewater discussed the potential for a higher for longer rate path to blindside markets a few weeks back. Here’s the link and an excerpt. 

“A near-term economic downturn, an extended period of above-target inflation, and a second round of tightening are not discounted in the markets at all. What the markets are now discounting is that the first round of tightening is nearly over, that growth will not slow much and yet inflation will quickly fall to desired levels and that this will allow a cut in interest rates in 2023 and 2024 that restores a normal risk premium in bonds. There is a lot of room for markets to be blindsided by what we see as the normal sequence of events which typically follows the conditions that exist today.”


  1. Tom Morgan is one of the more interesting and insightful writers on the interwebs. His most recent piece titled “At The Tipping Point” does not disappoint. It’s a high level meta discussion on where we are and where we may be headed. Here’s the link

Thanks for reading.

Stay frosty 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.


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.

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