Your Monday Dirty Dozen [CHART PACK] #13

Markets are constantly in a state of uncertainty and flux and money is made by discounting the obvious and betting on the unexpected. ~ George Soros

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at the year-to-date returns for major markets, take a step back and review some big-picture macro indicators, talk about the extremes we’re now seeing in bullish sentiment and positioning, and then look at gamma and what they may mean for markets. Let’s dive in…

  1. A year ago this week nearly the entire world was predicting a crushing recession and 08’ style bear market — we were not part of this crowd but were instead saying a major bottom was in. But, I admit, even we didn’t expect the year to turn out as strong as it did. I mean who would have thought a year ago that all stock markets around the world would not only finish the year in green but put in large double-digit gains. Markets are funny like that… The graph below is from KoyFin.

  1. This should be a quiet week for markets with the holidays and all so I thought we’d look at some bigger picture charts to see what 2020 might bring. This smoothed recession probabilities indicator is “a dynamic-factor markov-switching model applied to four monthly coincident variables: non-farm payroll employment, the index of industrial production, real personal income excluding transfer payments, and real manufacturing and trade sales.” It’s currently giving its highest reading this cycle but is still well below the level that indicates we’re near recession — meaning, not a major warning but something to keep an eye on. You can find more information on it here.

  1. Heavy Truck Sales, which is one of the critical leading macro indicators I track, just had its worst month-over-month drop this cycle. I suspect this is the result of the weak industrial and energy sector and tightening lending standards in the space.

  1. I’ve noted the weak LEI over the last few months, which is another troubling development. Inflation-adjusted retail sales are still positive though weakening. The consumer has been a critical driver of this recovery so how tight they are with their wallets will continue to be important in 2020. The labor market is still strong though trend growth is weakening. And financial conditions continue to run very easy which is bullish for risk assets.

  1. This chart from NDR and CMG Wealth gives another look at how favorable credit conditions remain.

  1. The underlying technicals of the market are strong but it has become overbought and overloved. Many of our sentiment indicators are at their highest levels since early 18’.

  1. Put/Call 3dma is now 2-Stdev from its average and the SPX’s RSI is in overbought territory.

  1. The NAAIM Stock Exposure Index is at its highest level since June of 18’.

  1. And Extreme Exposure is at its highest level since January 18’ and above the threshold that has consistently preceded turning points in the past.

  1. This chart from Sentiment Trader shows that Gamma Exposure (the sensitivity of option contracts to movements in the SPX) is at historically high levels. They noted that “if the S&P moves +1%, there is a potential 8 billion shares coming to market to push prices lower. That’s the most ever when averaged over the past 3 sessions.”

  1. Here’s a table from them showing the historical market returns following a Gamma exposure / NYSE Volume ratio of over 2.

  1. I tweeted about gold this last week (link here). Its price is at an inflection point, up near its upper channel line and 50dma. My bias is that it soon breaks much lower from here but we may see a false bull trap first with a breakout above the upper channel line. Keep an eye on this one.

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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.