Your Monday Dirty Dozen [CHART PACK]

He whom the ancients called an expert in battle gained victory where victory was easily gained. Thus the battle of the expert is never an exceptional victory, nor does it win him reputation for wisdom or credit for courage. His victories in battle are unerring. Unerring means that he acts where victory is certain, and conquers an enemy that has already lost. ~ Sun-Tzu, The Art of War

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at the near-term technical picture for the SPX and then we analyze the valuation hurdle coming for the US market, followed by a look at multiples around the world and then we make the bull case for Europe. Plus more…

  1. Last week was an interesting one for the SPX price action-wise. Let’s start with the daily chart below. Monday, the SPX broke below its 8-week tight bull channel (red highlight) after breaking above the upper trendline of its larger 6-month bull channel (green highlight) creating a bull trap false breakout, only to selloff down to the top of its even larger 22-month broadening top trendline (shown on weekly chart below) before reversing and ripping higher, back above the 6-month bull channel trendline right up against the bottom line of its micro bull channel, and ending positive on the week.

  1. Here’s the SPX chart on a weekly basis. See how we sold off last week down to the upper line of the larger 22-month consolidation zone. And then bulls aggressively took back control and ripped the market higher into the close for the week.

I admit I was expecting more follow-through from this move in order to reset the indications of short-term complacent sentiment and positioning that I’m seeing. And, though we may still get another leg down this week, the odds are now back in favor of a continuation of the bull trend. Action like this represents incredible strength in demand — this is not the type of tape you want to aggressively short. And when you combine this with the fact we’re moving into one of the most favorable periods of seasonality and nearly the entire fund manager space, who has grossly lagged the market year-to-date, will likely be chasing hard into the end of the year… well, the next few weeks should be fun.

  1. Looking further out though into 2020 the SPX is going to be fighting some decently strong headwinds in the form of stretched valuations absent a visible driver of earnings growth. The below chart from Goldman Sachs shows the year-to-date rally has been almost entirely driven by valuations rerating higher. Over the longer-term, this is unsustainable — especially in the US where valuations are already high. Either earnings growth will need to pick up materially or equities will hit a wall.

  1. The SPX’s forward PE is back over 18 and nearing the cycle highs it reached back in Jan 18’.

  1. The world as a whole isn’t as dear, though it’s not exactly cheap either. The MSCI World index currently trades for 16.1x next year’s earnings. The blue line shows that global earnings growth has essentially been flat for 18-months and counting.

  1. Some markets are trading much cheaper than others. A few of my favorites at the moment (based on technicals, macro, and value) are Malaysia (EWM), Russia (RSX), and Chile (ECH).

  1. Last month I pointed out how the MSCI Chile ETF (ECH) had sold down to an area of significant long-term support. A level that had marked major bottoms in the past. The chart below is a weekly and shows that ECH completed a double bottom pattern after finishing the week strong on a bullish reversal candle.

  1. We’ve been talking quite a bit lately about the vol compression regime that G10 dollar pairs are in and how compression regimes like these tend to lead to expansionary ones (ie, major trends). Well, currencies are driven by speculative flows and spec flows chase relative total returns. The reason why the dollar continues to perform well is because the US continues to perform well on a relative basis.

I’m watching Europe and the EURUSD closely though because if investors are starting to return to the continent after a long hiatus then this could have big implications for the USD. A big positive for this trend is net equity supply, which has gone into reverse and is now shrinking. Remember, buybacks have been the primary driver of the US equity market over the last couple of years (chart from Goldman Sachs).

  1. And not only are European company’s showing increasingly positive earnings beats over the last 2-quarters but earnings momentum there is starting to beat the US for the first time in a LONG while (chart via UBS).

  1. Economic growth seems to be stabilizing (chart via MS).

  1. This chart from Goldman Sachs shows that the aggregate 10-year rolling average of sales growth has been steadily declining for the last 7-years — at least until very recently.

  1. Congrats everybody, we did it! Global debt has surpassed the $255trn mark for the first time ever. Remember, absolutely none of this matters because… MMT ***strong sarcasm voice***.

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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.

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He started out in corporate economics for a Fortune 50 company before moving to a long/short equity investment firm.

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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.

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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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