The Bull Case for Crude

“Remember this: When you are doing nothing, those speculators who feel they must trade day in and day out, are laying the foundation for your next venture. You will reap benefits from their mistakes. Speculation is far too exciting. Most people who speculate hound the brokerage offices or receive frequent telephone calls, and after the business day they talk markets with friends at all gatherings. The ticker or translux is always on their minds. They are so engrossed with the minor ups and downs that they miss the big movements. Almost invariably the vast majority have commitments on the wrong side when the broad trend swings under way. The speculator who insists on trying to profit from daily minor movements will never be in a position to take advantage of the next important change marketwise when it occurs.” ~ Jesse Livermore, “How To Trade In Stocks”

Good morning! 

In this week’s Dirty Dozen [CHART PACK]  we go through the latest Fund Manager Survey, look at a record low allocation to tech, make the case to be cautious US stocks as well as the bull and bear takes for bond yields, before finally diving into some setups in crude, PM miners, and a LatAm E&P, plus more…

Let’s dive in. 

***click charts to enlarge*** 

  1. Fund managers around the world are “unambigiously bullish”, a record majority expect “above-trend” growth and inflation, and they collectively have their lowest allocations to tech on record, according to BofA’s latest FMS. At some point Bernard Baruch’s dictum that “something that everyone knows, isn’t worth anything” will begin to matter as growth & inflation expectations over-discount probable paths. We’re not quite there yet but we’re getting close…

  1. Gavin Baker, a portfolio manager and favorite twitter follow of mine, made a compelling case the other week for buying secular growth stocks (link here). I’m not sure I’m sold yet on growth’s prospects at the moment. Many of the big names (AAPL, AMZN, NFLX, etc…) are in large Stage 3 distribution phases. With that said, it’s always important to have a few names researched and ready to go should the picture change.  

  1. The below chart from NDR is one I like to check in on from time to time. It shows “Excess Liquidity Growth” as measured by M2 money supply – industrial production x PPI Commodities (YoY). The measure recently turned negative for the first time since September 18’. Historically, the SPX sees an average -5.62% annual return following such readings.

  1. Our base macro case calls for a top in the economic growth rate (delta) within the next 2-3 months followed by a deceleration, while maintaining a high level.

The NY Fed’s Nowcast shows growth already slowing some. But this is largely due to pervasive supply and labor bottlenecks. Manufacturers can’t get the inputs they need to finish goods and employers can’t hire enough people —  likely because many of are choosing to stay at home and collect the boosted UI benefits.

It’ll be interesting to see what happens when these issues are largely resolved later in the year. 

  1. This magazine cover annotated chart from @MacroCharts shows how far the Narrative Pendulum has swung, in regards to inflation and yields, over the past year.

  1. While I expect yields to hit somewhat of a durable ceiling in a few months, the data we track says the path of least resistance is up for now at least.

  1. We’ll need to keep a close eye on our leading inflation indicator (black line). It’s still trending up though it did recently see its first significant MoM decline in over a year.

  1. We’re not too interested in the US equity market at the moment — broadly speaking, we still very much like a number of idiosyncratic names. Outside of the US though, there’s a number of great setups. Take India’s Nifty 50 for example. It’s in a Bull Quiet regime and breaking out of a 4-month compression zone.

  1. The commodities in the red box highlight a good jumping off point for further research. These names are trading in either Neutral or Bull Quiet regimes. We can then use seasonality and positioning extremes to further filter the markets we should focus on. This is the process of stacking conditional edges upon edges, so we’re only playing in the most fertile fields. 

Through this process, we get crude, gold, palladium, and platinum. Oil for example is trading in a 3-month sideways compression range, in a BullQ regime, and net specs are in their 48th %-tile of its 3-year average (adjusted for OI). WTI just bounced off its lower Bollinger Band. So if you wanted to get long, this level is not a bad R/R one to do so.

  1. Precious metals continue to be my primary focus. It’s the largest position in our book and one I want to keep adding to on pullbacks. 

You can read our framework for analyzing gold and silver here. A great way to play this budding trend is in small-cap miners. The tapes in that space are setting up for lift-off. GLDG is one of these names (I have a position).

  1. Sentix provides a high-value signal regarding sentiment analysis of the crypto market. I’ve been following them for years and have found their work to be quite useful. With that said… if you’re still long a bunch of cryptos, you might want to heed their words below.

Despite the sharp price losses in cryptocurrencies, there is still no sign of an end to the downward movement. Even if tactical countermovements are very likely after such significant price losses, the sentix data do not yet indicate an end to the correction phase. On the one hand, the sentix asset class sentiment signals a clear turning away of investors from the asset class. The news situation and the price development have contributed to a considerable loss of confidence. On the other hand, the basic strategic confidence does not signal a positive trend reversal either.”

  1. If you want long exposure to oil and Latin America then the Mexico-based ADR VIST might be worth a look. The company operates oil and gas assets primarily in Mexico and Argentina. It’s selling for cheap at 2.5x next year’s earnings and is breaking out of a massive 18-month compression zone.

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.


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.