Your Monday Dirty Dozen [CHART PACK]

My brain… it cannot process failure. It will not process failure. Because if I sit there and have to face myself and tell myself, ‘You’re a failure’… I think that’s almost worse than death.

I create my own path. It was straight and narrow. I looked at it this way: you were either in my way, or out of it.

We can always kind of be average and do what’s normal. I’m not in this to do what’s normal.

We all have self-doubt. You don’t deny it, but you also don’t capitulate to it. You embrace it.

Pain doesn’t tell you when you ought to stop. Pain is the little voice in your head that tries to hold you back because it knows if you continue, you will change.

Everything negative — pressure, challenges — is all an opportunity for me to rise.

~ Koby Bryant, RIP

Good morning.

In this week’s Dirty Dozen [CHART PACK] we look confirmed sell signals in equities, revisit the indications of overbought and overloved stocks, and then reiterate our long bond call.

***click charts to enlarge***

  1. Friday’s bearish engulfing candle may have signaled the beginning of a 5%+ correction in US equity indices. Last week’s price action reversed the overthrow from the 4-month rising wedge after briefly passing above the important 3,300 level — which we talked about here. Some buyers came in right before Friday’s close, creating a decent sized tail. Momentum like that which we’ve seen over the last few months typically does not turn on a dime. So there’s a chance we see a small bounce early in the week. But a move below Friday’s low would portend a continuation of the down move which should play out over the coming weeks.

 

  1. It also happens that we’re moving into the meat of earnings season this week. Here are the most anticipated earnings releases via Earnings Whispers.

 

  1. Earnings are expected to decline by 0.5% this quarter. Of the 85 companies in the SPX that have reported, 68.2% have beat analyst estimates, above the long-term average of 64.9% but below the prior four-quarter average of 73.5%. So far, there have been 77 negative EPS preannouncements issued by SPX companies and 35 positive EPS preannouncements.

 

  1. The selloff is likely to extend to over 5% due to (1) the technical overbought conditions of this trend (2) the buildup in complacent positioning (see chart below) and (3) valuation levels which are now a significant headwind. The 3&10 day moving averages of the Call/Put ratio is over 2std’s above its average — one of the most extreme readings this cycle — meaning investors are buying a lot more calls relative to puts. The highlighted red zones mark past instances where the indicator was near current levels.

 

  1. The SPX’s Forward PE is now 19x. This is the highest valuations seen this cycle, with only January 18’ coming close. Valuations are now an increasingly large headwind for stocks.

 

  1. Retail has finally decided that now is a good time to become incredibly bullish. AAII Bullish Sentiment just hit its highest levels since January 18’.

 

  1. And Investors Intelligence shows that “Advisors” last week became their most bullish on stocks since October 18’, right before the large selloff in the equity market.

 

  1. This chart from Morgan Stanley shows that cross-asset volatility is back near 15-year+ lows. Low vol regimes lead to high vol regimes. And we’re nearing that point where things can’t get much better.

 

  1. The McClellan Summation index (NASI) triggered a sell signal on Friday. Highlighted red zones mark past occurrences.

 

  1. Breadth has kept me from turning bearish on this rally but that is now starting to change. The percentage of stocks trading above their 10-day moving averages just crossed below 50%. This is a precondition for a larger sell-off.

 

  1. The Nasdaq / Bond (QQQ/TLT) ratio recently hit its highest mark since the end of September 18’. My money is betting that we see some mean-reversion here.

 

  1. Bonds confirmed their breakout from their descending bullish wedge last week (ZB_F, TLT). I recently raised my bond position from 100% of NAV to 200%. Bonds also have copper/gold and positioning in their favor, which I tweeted about last week here.

 

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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.

AK

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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