Before we start here’s a link to a coronavirus cheat sheet I put together yesterday. It has all of the key data and resources I’m using to track the spread of the pandemic. I’ll be updating it regularly as new info comes in.

There a few main takeaways at this point (1) the situation is evolving rapidly and there remains a good deal of uncertainty; so we must stay humble in our assumptions (2) most experts seem to now agree that the virus’s fatality rate is likely to come down significantly from current estimates of 3.4% to somewhere between 0.1% and 0.5% — for comparison, the seasonal flu has a fatality rate of less than 0.1% and (3) even at these lower fatality rates the virus is expected to greatly stress the current resources of our healthcare system.

From a purely economic and market standpoint, the risk now seems to mostly be concentrated in our response to the virus as well as the lasting behavioral impacts on the consumer. School closures, canceled events, and quarantined clusters are likely to persist for the foreseeable future though there’s credible reasons to hope that warmer weather brings slight relief from the virus to the Northern hemisphere.

The market is forward-looking though and will look past these near-term events if the narrative begins to take hold that the all-in costs of this virus are significantly lower than first expected — this remains a big if and I suspect it’ll take a few weeks, if not longer, to get there.

In addition, the recent 50bps rate cut from the Fed along with the global calls for boosting fiscal spending, in response to the virus, certainly don’t hurt the bull case for stocks.

Which brings us to today.

After the technical damage done to the charts following February’s large bearish engulfing candle, my base case is that markets will need some time to digest the move and build up support before it can make a move for a new high.

Therefore I expect a period of extended sideways chop with a downward bias.

However, with the improving optics around the coronavirus along with a few of the charts I’m about to show you, I’m willing to start adding some risk at these levels because at the very least I think we may get a tradeable bottom.

Now onto the charts.

A couple weeks ago I was pointing to the SPX’s elevated forward PE ratio as one of the many reasons to be cautious on the market. Back then it was trading near a cycle high of roughly 20x. Following the selloff, it’s now around 18x next year’s earnings.

Equities don’t trade in a vacuum. Like everything else in this world, their value is relative. That’s why one of the key indicators I track is the rate of change of US BAA corporate yields. Rising yields mean bonds become more attractive on a relative basis to stocks leading to tightening financial conditions and vice-versa.

The BAA yield RoC is nearing all-time cycle lows. Note the other two times it’s been near these levels it has coincided with the start of major bull legs….

The SPX’s dividend yield’s spread to the 30-year Treasury is at its second widest point in history; with only the depths of the GFC beating it.

But since US corporates prefer buybacks over dividends, let’s use the earnings yield to gauge the equity risk premium (SPX earnings yield – US10yr) on offer.

At 3.8% it’s the fattest its been since early 2016.

According to Bloomberg, “Historically, when the equity risk premium climbs above three percentage points, the S&P 500 is all but guaranteed to post a positive return in the next 12-months”. TINA (there is no alternative) can be a hell of a drug for equities in a zirp world.

And finally, SentimenTrader’s Smart/Dumb confidence spread is back at levels that were last seen at the start of 2019, right before the rally.

I’ll be honest, I don’t have anywhere near the conviction to buy here that I did, say last October or back in Dec/Jan 19’.

Sometimes in this game, the odds are clearly stacked and sometimes… not so much. The great thing about trading and investing is that, unlike poker, we don’t have to pay an ante. We can sit out completely and wait for our setup.

Personally, the above is enough for me to start testing the waters on the long-side by adding some risk. There’s a few individual stocks with great setups and strong fundamentals which give us killer risk-reward entry points. I’ll be sending out a write-up on these names to Collective members later this afternoon.

Keep your head on a swivel and manage your risk.

Thank you 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.