What a deGraaf Thrust Signal Means for Value Stocks [DIRTY DOZEN]

You can either play the system or you can let the system play you. I like playing the system because it’s more fun and you win more. If you let the system play you, you can get very frustrated and very beat up. ~ Jim Paul, “What I Learned Losing a Million Dollars”

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at the SPX breaking new highs as well as Bear hearts, check in on what the Trifecta Lens is saying, cover a major rare breadth signal and what it means for small-cap performance, pitch the secular macro bull case that no one is talking about, cover Bitcoin stability, excess savings, the beginnings of a commodity bull cycle, and pitch a deep value tobacco stock, plus more…

Let’s dive in.

***click charts to enlarge***

  1. The SPX closed at new all-time weekly highs last Friday. This puts it above the “Broadening Top” pattern (if you draw thin lines) that the bears have been clutching too like fine pearls. It formed a weekly Doji candle, which is a neutral range bar. And that’s to be expected because as I pointed out to fellow Collective members last week the 3,550-3,600 represents multiple levels of resistance (top of multi-year pattern, upper weekly Bollinger Band, large round number etc…). But this is the price action you want to see if you’re a bull…


  1. In a world full of noise it pays to reduce complexity and KISS (Keep It Simple Stupid). Our Trifecta Lens Score is a +2 and the market is in a BullQ regime. Both bode well for further upside. The big drag on our TL model is sentiment/positioning, which is at -3 (green line in middle graph).


  1. The deGraaf Thrust Indicator triggers a bullish signal when over 60% of issues make 20-day highs. Last week triggered the second signal in under 6-months and marked only the 10th time in history that this indicator spiked over 70% (h/t to RenMac).


  1. @RenMac points out that when this signal triggers twice in six months it often marks a turning point in favor of small-cap/large-cap and cyclical/defensive relative performance.


  1. The near-term bearish case is that the market is setting up to trap the bulls on a false breakout just in time for the COVID narrative to take over in the winter and lead to more shutdowns and a positioning washout. Things are going to get ugly in the coming months as temperatures cool. At the current trajectory, much of the US is set to breach ICU capacity within the next 60 days.

I think that with vaccines and more stimulus on the way the market may be able to look through this. But… it’s certainly a scenario that we have to entertain.


  1. Analysts continue to set a low hurdle for the market to clear. Jesse Stine shared this earnings estimate graph last week and wrote:

“Banks/Analysts playing major games post Covid. As always, CEO’s and CFO’s have SO many levers to pull to beat estimates. MASSIVE beats in Q2.Into Q3 earnings, analysts expected -20% EPS. Results: +2% lol. Q4 looks like another joke. They may be setting us up for Q1 Biden rug pull.”


  1. I shared these charts from UBS back in September. They’re part of the compelling longer-term bull case that nobody is talking about, so I figured I’d share them again.

The chart on the left shows the population growth by cohort (35-55 and 65+) on a YoY basis. As you can see, the 35-55 age group is inflecting higher while retiree growth has peaked and is set to rapidly slow. This is important because the younger cohort tends to own more equities as a % of investment versus the 65+ group which is more heavily weighted towards less risky assets.

The chart on the right shows the correlation between the growth difference of the two cohorts (gold line) and the equity risk premium (blue). If this correlation continues to hold then we should see the equity risk premium — which is currently well above its long-term average — narrow significantly. And since the Fed is unlikely to let yields rise, that means higher equity valuations are in order.


  1. In addition we have repaired consumer balance sheets and excess savings. The following is from GS, “households are likely to lower their high ‘forced’ saving rates, and to spend down some of the excess savings that accumulated during the pandemic .. We expect this to trigger a mid-year consumption boom that lifts .. annualized GDP growth to +7% in Q2 ” (h/t Carl Quintanilla).


  1. The reflation-rotation trade may or may not take a breather as the COVID narrative comes back in force. But one way or another it’s going to kick into high gear soon. Capital Cycle dynamics and loads of government money — not to mention Wealth S-curve dynamics — all but ensure it.

Read the following from GS:

“The volatility in commodity markets in recent weeks is a reminder of the damage that lockdowns can do to commodity—especially oil—demand. But what is far less visible is the fact that structural under-investment in commodity-producing sectors over many years has meant that even the faltering recovery so far is generating a deficit in major commodity markets with inventories drawing. Given that inventories are drawing this early in the cycle, we see a new bull cycle for commodities emerging in 2021 as demand recoveries meet restrained supply (Exhibit 6).


  1. I keep saying it but I like EM going forward. Its equities and FX are dirt cheap as GMO points out in its latest report (link here). MXN is still my favorite.


  1. I’ve been writing for months now that the new bull market in Bitcoin is going to be driven by institutions and not retail. This is important because it means much steadier hands as well as deeper pockets.

Ye Xie, writing for Bloomberg last week, made some key points, noting “Billionaire investor Stanley Druckenmiller explained this week why he owned some bitcoin in an interview with CNBC:

‘Bitcoin could be an asset class that has a lot of attraction as a store of value to both millennials and the new West Coast money — and, as you know, they got a lot of it. It’s been around 13-years and with each passing day it picks up more of its stabilization as a brand.’

“What’s interesting is that the volatility of Bitcoin relative to the S&P 500 has dropped to historical lows this year, one of the most tumultuous periods in recent memory.

Interesting indeed…


  1. I love plays that have multiple positive drivers. Tobacco company, Altria Group (MO), fits this bill.

We’re in a macro environment that is slowly going to start favoring the value space (finally!). MO is a stalwart with an iron-clad balance sheet that trades at 9x FCF, has an 8.5% divvy, and is in an industry that has the best long-term track record. Also, the technicals are cherry with the stock bouncing off its 200-month moving average (blue line). A level that has acted as a support every time in the past. And it’s put in a large double-bottom. It might be time to take a puff…


Two Roads Diverged In A Wood And I – I Took The One Less Traveled By, And That Has Made All The Difference. ~ Robert Frost

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.

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