Stocks and the Current Environment

Starting with some thoughts I tweeted on June 17:

Here’s a chart showing how extreme the selling/capitulation has been:

This is absolutely historic selling. Remember DotBust? Lehman? This is even more selling than seen at the depths of those recessions.

If a global recession is coming, it will be the most widely anticipated in history.

Everyone finally sold out perfectly at the top.

I’ve lost count of how many charts look like this, most at historic extremes. Every time I send one out, 90% of the responses are “this is 2008, crash coming”.

Take this next chart as an example:

Pretty self-explanatory. I shared it on Twitter with the following commentary:

The Russell 2000 has seen a historic wipeout in positioning (like everything else). Traders have completely abandoned this index, perhaps using it as a “hedge” against other holdings. Look at the bottom panel, showing Small Speculators in a historic selling capitulation, matched only by 2008. Extremely contrarian Bullish.

Then I added:

Now look at all the bottoms in the last 11 years. Small Traders were capitulating/selling in all of them. Forget Stocks for a moment. When Small Traders do this in any market, emotions are the primary factor. Avoid emotions, they are the enemy.

Here are some of the responses I received after posting these two charts:

“It says we are in 2008 all over again”

“Small Specs are smart money, this is right before a giant crash”

“Doesn’t matter, liquidity is falling and nothing can stop it”

“There is nothing but talk about how bearish everybody else is. Kind of funny”

“Translation: smart money leaving, dumb money overpaying”

Only one person responded to the first chart with the following:

“Looks like all were great entry points”

Every day since Stocks bottomed in early June, I continue to be surprised by how extreme the mood has become. And it’s not just the data. Even just talking to people it’s clear that a deep fear/anger has taken over. Emotions are at historic extremes.

I’ve kept a trading journal for over two decades. This is a shortened version of what I’ve observed these last few weeks:

  • Since Stocks bottomed in early June, it’s been a relentless rally only surpassed by the extreme reluctance to embrace it. Every single day it’s the same story, veiled in some fresh argument:
  • First I was told the rally was fake because it was all short-covering and not real buying. Then it was supposed to fail at resistance, as traders bought massive Puts and investors sold their longs (what little they had left) down to the bone, pushing my models to extreme oversold. As June FOMC approached, Stocks had supposedly gotten ahead of themselves and would peak on the Fed announcement. Then I was told Stocks barely rose after the announcement, which indicated buyer fatigue. The next day when Stocks exploded higher again, I was told the Fed was manipulating rates on behalf of the White House. Now with the S&P grinding highs “it’s too late to be bullish” (this is from an actual headline that came out last week). To top it off, on the day of the breakout last week, traders pulled billions out of SPY because they felt like being even more in cash.
  • Mass insanity is the only way to describe the last few weeks. The Bearish narrative is so entrenched that it still hasn’t adjusted to the fact that Stocks ran to new highs in almost a straight line. Bears were promised a recession, a deflationary bust, a trade crisis to last “the rest of our careers”, an “uninvestable anti-Tech mood”, “Tech’s glory days are over”, and “don’t take any risk in 2019” (these quotes are from various media articles published during this rally). And now, with Stocks at the highs the same people who missed the whole move say “it’s too late to be bullish”.
  • Paul Tudor Jones once said there is no training for the last third of a Bull market. There are very few people left in the business today who saw both the 2006-2007 Housing/Commodity/EM Bubble and the 1999-2000 Tech Bubble in real-time. The current environment is the complete opposite of those periods.
  • If the Bull market HASN’T ended, then it’s missing a classic “final third”.

Back to the same chart from earlier, adding some red lines:

This is the third time in this Bull market that Stocks recovered from a large correction but investor selling continued relentlessly. In 2012 and 2016, the selling persisted until Stocks had already pushed all the way back to previous highs. The following years were both massive extension rallies.

I can already hear the feedback…

“But it will end in tears just like [insert favorite year here] all over again, Short everything!”

Maybe it will end in tears. But I’m not sure that it has to end right here. One thing we can all agree on, is that history repeats itself. Just don’t forget it can also repeat itself on the upside.

IN SUMMARY…

This is one of the most extreme environments I’ve ever seen. Though I am far from certain, I think the path of maximum pain is higher. Stocks & Commodities are rising, the Dollar & Bonds may be headed lower. Central Bank liquidity is coming back, not just in the U.S. but all over the world.

Meanwhile against this backdrop, Stocks just posted the biggest first-half gain since 1997. You know what else last happened in 1997? Stocks broke to new highs with more individual investors leaning Bearish than Bullish (AAII survey). Who knows, maybe it’s time to dust off the old diary from the 1997-1999 “last third”, just in case.

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The Most Important Force in Stocks

Tell me if you’ve heard this over the last ten years:

“The economy of [X] is more dependent on debt than ever before”

“Companies are issuing record debt to buy back stock, this will end badly”

“Debt is too high and the [economy/markets/savings/wealth] will [explode/implode]”

“The Bond rally is telling us something bad is coming”

Extra points if you’ve heard all of these from a market guru, famous economist, TV personality, ivy professor promoting a book, or ex-hedge fund manager with a blog.

Let me start by saying that markets don’t operate on absolutes. I’ve been trading for 25 years. In the arena every single day. In the middle of this organized chaos, I hear academics every day, taking turns shouting from the gilded seats, trying to be the one who predicts what happens next (always loud and full of confidence).

There is a simpler truth to markets. One that academics/noise-makers cannot grasp, yet all successful traders inherently understand: Sometimes things matter, other times they don’t.

A trader’s goal should be to constantly discard everything that doesn’t matter, so that what’s left is essential.

Let’s try this now, using a historical chart:

Top panel, S&P and 10-Year Yield. Bottom panel, 1-month Net Change in 10-Year Yield (2006-2019).

Now let’s add vertical red lines for every time the 10-Year Yield rises significantly over a 1-month period:

Looking above: see the spike in Yields in June 2007? That was the largest since 2004 (not shown). How about mid-2013, the Fed doing QE3/Infinity but the S&P still traded sideways from May to October, because Yields spiked three different times? Or 2015, Yields spiked twice and Stocks traded sideways for a year. Or most recently in 2018, Yields spiked in January & September and Stocks collapsed both times.

(Also notice above, how spikes have become far less frequent since 2013.)

Nothing works 100% of the time, and Yields have spiked on occasion with Stocks moving higher anyway (2016 a prime example). Nevertheless, over the last 15-20 years, rising Yields are usually bad for Stocks.

Now let’s add vertical green lines for every time the 10-Year Yield falls significantly over a 1-month period:

Recently on June 3 2019, Stocks may have formed an important bottom, after 10-Year Yields fell -47bps over the prior month. In the last four years, only one day had a bigger 1-month net drop in Yields: February 10 2016 (-51bps), which was the day before Stocks bottomed.

Once again nothing works perfectly, but Stocks generally do well after Yields fall sharply. So let’s go back to the start: is the recent Bond rally telling us something bad is coming?

Maybe.

Or maybe despite the loud chorus of sideline crisis-callers, the Bond rally may have just saved the economy (and the Stock market) yet again.

For this entire Bull market, yield declines of this magnitude have created huge runways for Stock prices to recover.

Bull trends die from inflation scares, not disinflation scares. Some of the biggest Stock corrections in recent years came after Yields rose sharply.

Equities love low-inflation/disinflationary growth. If there’s one “truth” in investing, this could be it. Disinflationary growth has kept this Stock Bull market plodding along for longer than anyone thought possible.

For more than a decade since this Bull market began, Stocks have been repeatedly hit with disinflation scares (mostly due to the Dollar rallying, like this year). Those scares pushed Yields sharply lower, clearing the way for Equities to recover, eluding the crash-callers each time. This latest Bond rally could rekindle the same old Bullish force for Stocks, right when the academics are rushing to call it a bad omen yet again.

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Consensus Lawnmower (2019 edition)

Almost everything investors believed just a few months ago has been cut down:

  • EM & China were among the best places to invest.
  • The Fed was “friendly” and the Dollar would continue to weaken.
  • Equity & Rates Volatility would stay low because the Fed removed tail risks.
  • Commodities were going to make a comeback.

Feels like a long time ago, but these views were widely accepted until very recently.

In Mr. Market’s twisted Yogi Berra irony, 2019 has already been a tale of two halves, except we’re not even halfway yet.

Rolling waves of pain:

  • U.S. Financials & Banks fell sharply in March, and bottomed.
  • U.S. Healthcare & Biotech fell sharply in April, and bottomed.
  • The Dollar has rallied sharply, cutting through every consensus EMFX trade.
  • Like last year, the Dollar is moving in waves. First against the weak current account countries (ended a month ago), then Asia (largely over I believe, and wrote about last week), now migrating to a few select final pockets. Wherever the carry books are still holed up, that’s where the Dollar has unfinished business.
  • Asian Stock markets fell sharply in May, in some of the heaviest selling waves in history. Some markets broke selling records, far greater than even the panic in 2008. I’ve documented this extensively on Twitter and prior blog posts. Yet this week, momentum has been quietly stabilizing.
  • As EM tries to stabilize, U.S. markets continue to decline and look for a bottom. Yesterday, the main EM ETFs were up while U.S. indexes were down almost 1%. U.S. Tech in particular is starting to fall faster than most other areas.
  • U.S. Semiconductors, which rallied 50% from the December lows and triggered historic extremes in late April, have given up more than half their gains and become “ground-zero for trade war risk”. Quietly, they closed up yesterday even as the rest of U.S. Tech was down nearly 1%.
  • Even the U.S. defensive sectors are dropping sharply. Over the last two days, they lost nearly 3% (roughly 2-3x what broad markets fell). When Bears take out the defensives, they are running out of targets (everything else has been eradicated). This happened in December too.

True bottoms are made when the Bears successfully take down all the last pockets of strength. Sellers have relentlessly and systematically purged the haves for nearly two months. Everywhere we look, the haves have turned to have nots: there’s no one left overweight EM, China, Semis, EMFX, or any cyclicals of any kind. Defensives are heavily favored. Bonds are in a panic spike.

Meanwhile, Chinese stocks are quietly stabilizing directly above the support targets I’ve been tracking for several weeks.

Is it possible that China is forming a base ahead of the U.S.? It’s an extremely contrarian scenario. It also happened three years ago in 2016:

History doesn’t have to repeat exactly, but it wouldn’t be the first time EM & China were sold to the bone, only to bottom ahead of the U.S. and lead the recovery.

The destruction of consensus trades came in waves of selling. It works the other way around too. If sentiment is approaching rock bottom, the recovery will also come in waves:

Here is a candidate for the first wave: a key Asian market, stuck in the middle of the trade war, with heavy exposure to the Tech & Semiconductor industry — representing a massive 50% of its stock market capitalization. Essentially this market is uninvestable in the current environment. All of this psychological damage, for a simple gap fill and base on the 200dma.

We’ve already documented the historic outflows from China and everywhere else in EM. So for posterity, here is the wave of selling that just went through the same market from the prior chart (Taiwan):

No one can say with 100% certainty if the bear case is now fully priced in. What we do know is, many highly-exposed markets — most now deemed uninvestable by the same folks who were pounding the bull case just a month ago — have been deleted from investor menus, have stopped falling on bad news, and are now rising even as U.S. markets continue to search for a bottom.

Over the last month, the market wrote a story gradually, as prices came down. Now another story is quietly being told, for those that are listening. A story that will likely carry bullish implications far into the future.

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Closing my Long USD positions

A quick background on my Dollar view:

I started buying USD-EMFX in March based on (1) my trend models suggesting a major potential move, (2) short-term momentum quietly shifting in favor of the Dollar, and (3) crowded carry positioning and extremely low volatility likely to blow up simultaneously and force deleveraging.

My main fundamental premise was that the economy was doing fine and the market was way too dovish on the Fed. At the time, consensus was looking completely the other way. The narrative was all about the “friendly Fed”. It all went out the window when Powell said low inflation is “transitory” on the May 1 FOMC – which in hindsight was also the day U.S. stocks topped and reversed.

What I’m seeing now that makes me want to rethink my Long USD view:

The Dollar’s rally is getting extremely stretched from a quantitative trend perspective. I thought it would take several months to achieve this, but it took only two. This was one of the most explosive Dollar rallies in such a short period of time, particularly against EM currencies.

The move looks unsustainable at this point – for instance here is the trend strength in USDKRW, which was my biggest Dollar-EMFX position until yesterday:

Here is the same chart for USDCNY. Look what happened to prices historically after similar extremes. A whole lot of nothing. Maybe it’s time to sell some straddles.

The Dollar’s strong momentum could have residual upside, particularly versus Asia on lingering trade war concerns, but I think it would be part of an “M-top” structure, where it chops sideways for a bigger Weekly momentum turn.

For instance, this is a USDKRW chart I tweeted yesterday:

In the chart above, note the M-top patterns in 2014, 2015, 2016 and even 2018 when the MACD got this elevated and rolled over. Incidentally the MACD finally crossed down this morning.

In summary, overall this Dollar move was much more extreme and sharp than I envisioned. Maybe this means it has more to run, particularly if the trade war escalates. Or maybe (I think) it’s close to pricing in a full-blown crisis. Asian FX & Stocks look particularly priced in, having experienced massive outflows in recent weeks. The adjustment looks mostly finished to me, and I prefer to take my hard-earned profits and move on to another opportunity…

I think the next big opportunity is to find the bottom for U.S./China stocks and get aggressive on the Long side. I’ve had this view for a couple of weeks, prices are getting close to my ideal levels and sentiment is almost in the basement. And if the Dollar’s momentum starts to slow, I think it could help underpin Stocks at the perfect time.

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Equity Market & Model Review

Before we begin, a quick review of three things I think are happening:

  1. Stocks are in the midst of a 3-6M volatile sideways range. Mean reversion should be the dominant regime over the next few months. Equities are unlikely to sustain any trend.
  2. Mean-reversion goes both ways. The initial decline has already triggered significant oversold signals in my Core Models, far more than is “normal” for such a small 5% pullback.
  3. This diminishes the risk of another 2018-style collapse.

Now let’s look at some charts and see why…

My Core Equity Model has fully reset to an oversold condition. This is my most important model. It aggregates all the Equity data I run. Any residual decline could trigger a full Buy.

This is my Core Equity Risk model. It’s extremely oversold and ticking up, which triggers a Buy signal. It’s at one of the lowest points in years, matching some major bottoms in the past. Yet the S&P has only pulled back 5%.

This is my Master Flow Model. It combines all Equity flow data I monitor. It’s still falling as more investors move to the exits. Selling continued even as Stocks chopped sideways last week. Looking for a bottom near the target area (red line).

Some of my individual Core Flow models (which are inputs to the prior chart) remain at a strong Tactical Buy signal since early last week. Starting to move up.

Market on Close (MOC) order volume. Traders are selling aggressively at the close. No desire to hold overnight risk. Getting very “oversold”.

Put/Call Ratios (10d) are almost fully oversold. Still falling, no sign of improvement yet. But most of the adjustment looks complete. Sentiment has fallen significantly. Looking for a bit lower then a turn to confirm.

VIX short positioning has been cut in half. Could be moving to an extreme Long (see ideal target area). If so, the unwind is 50% finished. Or it could just go to the minimum target (similar to 2016). If so, the unwind is 75% finished. Newspaper stories are already showing more fear priced in (snippet below the chart).

Next, my Volatility Seller P&L Model. Profits have been wiped out. This was my base case scenario and it’s now complete. Things could get worse, but I think the damage would be very brief and quickly reverse, like in Brexit in 2016 for instance. I don’t think the odds favor another extreme decline, not like 2018.

AAII Survey Bears increased +16 last week. This was the sixth largest increase in ten years. The wall of worry is quickly being rebuilt, similar to 2012 & 2016 while Stocks traded near their highs. Positive for the eventual breakout and continuation of this advance.

AAII Bull-Bear Spread collapsed -29 last week. This was the third largest decline in ten years. Huge drop for such a small market pullback. The wall of worry is growing.

One reason Sentiment is falling so rapidly: Stocks are gapping down a lot in the last few weeks. It’s creating a lot of discomfort. No one wants to hold overnight exposure. It’s also driving traders to sell aggressively at the close, as I showed earlier.

Below, the negative gaps are so extreme, we’ve only seen them at the capitulation stage of much bigger declines – for instance 2009, 2010, 2011 and 2015. Mr. Market has cleverly made a 5% pullback feel like a major correction. Look for conditions to improve.

S&P short interest has risen sharply, back to the top of the range of recent years, and where Stocks typically found some support. (source: Markit)

Adding it all up, my models exhibit considerable damage for such a small 5% pullback. The correction may not be finished, but the psychological damage is already extensive.

Ultimately this reinforces my mean-reversion thesis, while diminishing the risk of another 2018-style collapse. The longer we’re stuck in this chop, the greater the likelihood that trader sentiment drops even more. Ultimately, this could set the stage for an eventual breakout, perhaps later in the year.

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Approaching Tactical Bottom in U.S. Stocks

CORE MODELS

Extreme oversold signals suggest Tactical bottom approaching over the next 1-2 days. Look for reversal to confirm.

This is one of my Core U.S. Equity Risk models. It’s almost fully oversold and very close to a Tactical Buy signal. This suggests an elevated probability of a sharp retracement rally starting soon. This may be the first of two oversold signals similar to the 2016 structure I’ve been expecting (the second one later in October-November).

My Options Gamma Model also very oversold. Positioning may have gotten too negative and is vulnerable to a squeeze.

Several of my U.S. Core Flow models are also extremely oversold. I run several flow models for U.S. markets. Many are scraping the bottom of the barrel here. I haven’t seen a capitulation of this magnitude since February 2018, which is remarkable for a small correction of just 5% so far.

SCENARIO

PRICE

S&P may have residual downside to 200dma and lower band at 2750-2780 area. An undershoot could target 2720 but is less likely. Not shown, NYSE Composite and many key cyclicals are already at respective 200dma and lower band support. Looking for sharp rally possibly to the 2900 area (5-6%).

S&P Daily RSI has reached my minimum target for this initial leg. This is identical to the 2016 period. The market may need 1-2 stabs lower but I’m on high alert for intraday reversals. Stocks have four more days to finish the week. This is a long runway with models so oversold. Any rally later in the week could quickly feed on itself, especially with Gamma this negative. Stocks could still finish the week with a powerful weekly Hammer or bullish reversal.

TIME

S&P E-Mini has a pending Buy Setup that should complete in two days if the market just trades sideways from here. There is also a major Bradley Cycle Date on May 16, the exact day of the potential setup completion.

Adding it all up, this two-day window through Thursday looks like a potential setup for a Tactical turn. Accordingly I am switching my own trading bias to Buy on residual declines over the next 1-2 days. This is my personal trading plan based on my own objectives and risk tolerance, and not an investment recommendation. While I don’t think this is THE bottom, I do think Volatility will remain high and the potential for a sharp squeeze is increasing.

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The Current Stock Market Correction

In late April, nearly four months into a historic Stock rally that began in late December 2018, I tweeted some Summary thoughts and suggested plan for Q2-Q3:

I proposed two core ideas at the time. In this note today, I will focus on the first idea — Stocks. My reasoning is based on some charts that really stood out to me at the time:

First, Stocks were very extended in late April and likely to switch to a volatile mean-reverting regime. On April 29, I tweeted the below chart, showing the S&P Technology sector’s trend strength at one of the highest in history. I added that “a major corrective phase is likely to occur this year, lasting several months. Could be a topping process like 2000. Or (as I believe) a multi-month big volatile consolidation similar to 1991, 1995, 2004, 2012.”

Note the red boxes I drew above. When Stock prices move significantly in one direction for a relatively short period of time, they exhibit very high trend strength. Eventually, this reaches an extreme and the strong trend is vulnerable to exhaustion. The result is a return of two-way volatility, usually a violent sideways consolidation. This is what the red boxes show. And that was my best guess in April for what was coming.

Stocks are now correcting, but I believe we are still in a Bull market. One can never been 100% certain in markets, but I think a Bull market is still the most likely scenario. Note in the prior chart — in 1991, 1995, 2004 and 2012, Stocks rallied strongly and then consolidated bullishly for several months, ultimately moving higher.

I also think this is more likely to be a single digit correction, not another severe decline like last year. To illustrate why I think we’re in a Bull market, and why the correction should be relatively mild, I present the chart below: in late April nearly 80% of S&P stocks were trading above their 200dmas. The key condition to evaluate is: is Stock Breadth ABOVE or BELOW the 50% line?

At the time, I tweeted this chart and wrote it’s “reminiscent of the 2016 rally which reached 78% before two pullbacks that held above 50%. This is very positive longer-term. Market likely to correct through time, maybe 5-10% downside volatility next 3-6M.”

Further, notice above that the most violent declines of the last several years: August 2015, January 2016 and December 2018, all shared the same weak Breadth characteristics under 50%. (In fact this is a recurring feature of virtually every big Stock decline of the last 100 years.) Even late last year, note the red “X” in October-November 2018. That’s where Breadth failed to exceed 50% and soon after, the market collapsed in a second selling wave.

For reference, here is the same Breadth indicator from 2005-2009. Note the 2008 Bear Market began when the indicator failed under the 50% line. I marked it with a vertical line below. Soon after that, Stocks finished their topping process and began to decline in earnest. When I look back at the chart from April 2019, it’s a long way from any serious weakness and still looks like a Bull market.

I’ll add more charts next, but it’s important not to forget this simple concept illustrated above. In markets, I believe the simplest ideas are the most powerful. What is simple is often misunderstood. When I started in markets, I thought the most complex indicators would give the best results. I searched far and wide looking for answers. In those early years, my quest for more information led to an advancement in my theoretical understanding, but yielded few practical insights. When I decided to refocus on the right things, everything changed. The most important lesson I learned in those early days was: the market had been communicating the message all along, and simplifying my focus allowed me to listen.

Now let’s go one step further.

The next chart is from an idea I tweeted on May 7, where I noted the “Nasdaq Composite with roughly half its Stocks trading >200dma (red series), similar to where the initial rally topped in April 2016. Intermediate breadth weakening, just 56% trading >50dma (blue series). When this breaks below the 50% line, a correction is likely to be underway.”

Unlike S&P Breadth which as we just saw earlier, got very high at almost 80% of Stocks > 200dma, the Nasdaq Composite Breadth was much weaker and still under 50%. Below is an updated version of that chart. Note that 200d Breadth never did get above 50% and now 50d Breadth is moving back under the 50% line. Not surprisingly, we’re starting to see Volatility creep up again.

There are some striking similarities between the current market and some important prior periods. Let’s look at what they are, and what it could mean.

On May 2, Michael Santoli of CNBC noted the following on Trading Nation:

“As S&P 500 sits at a record, nearly a quarter of stocks are still stuck in a bear market […] at least 20% from 52-week highs.”

This weakness is important to study and discuss. I made this chart to illustrate the idea, with some of my own annotations and thoughts added. What we have is a market that rallied back to prior highs, similar to 2012 and 2016, but many Stocks are still more than 20% below their own highs. In other words, the Trend is strong but Breadth participation is weak.

What happened in 2012 and 2016? Stocks spent months basing near the highs, with two separate pullbacks each time. Exactly like the volatile “red box” consolidations from the very first chart, where we talked about the Trend strength being too high and the mean-reversion that ensued. Everything is tied together and related.

Corrections come when uptrends become extended and Breadth can’t keep up. In 2012 and 2016, the result was that Stocks needed time to rest and gather the energy to move higher.

First, let’s look at 2012:

Now let’s look at 2016:

And back to today:

What could this all mean, and what could we see from here? Following the Summary thoughts shared at the top of this note, here are some ideas I’m carefully balancing and considering, while remaining focused on the bigger picture (and keeping it simple):

  • We may be more than halfway through this correction in terms of price. If the 2012 and 2016 interpretations are correct, and we remain in a Bull market as I believe, the S&P index could perhaps bottom in the low 2700s.
  • Historically, Stocks went through mean-reverting phases that lasted 3-6 months and we’re still not even a month into this one. So it seems we could still be in the very early stages of this process, in terms of time.
  • This could provide plenty of opportunity to slowly accumulate good Stocks as weak hands lose patience, get frustrated or shaken out.
  • It seems the market’s goal here is to frustrate Bulls and Bears with a lot of erratic price movement, while ultimately making little net progress either way.
  • Because of the extreme volatility of 2018, some may fear this will become another massive decline. Since Mr. Market never makes things easy, a sideways range could be equally if not more difficult to deal with.
  • Looking back at history, the good news is that once 2012 and 2016 were out of the way, the following years were excellent for Stocks. The S&P advanced 30% in 2013 and 20% in 2017.
  • Those great advances weren’t a coincidence. Stocks had worked off their extended condition through time, while Breadth improved gradually and individual names began to catch up.
  • When Stocks had finally gathered the energy to rally again, the breakout came and they never looked back. Maybe we’ll see something similar later this year, when everyone becomes exhausted of the headlines and volatility.


Thanks for reading.

If you liked this post, feel free to share it with colleagues and subscribe to the blog to receive future updates. I’ll be revisiting this theme and many others over the next months, on my Twitter account and in bigger thematic pieces here.

Some notes on Stock sentiment

Last week produced a list of “Bullish” news so extensive, I don’t recall seeing anything quite like it in many years. I’m writing a list to organize my thoughts with the goal of revisiting everything later on. Perhaps there is something to be learned here. Only time will tell.

To me, it looks like sentiment is completely euphoric and speculation is rampant. While this kind of excess can sometimes keep going and get even more extreme, one thing is clear: we’ve come a long way from the dark days of December.

  • Major Wall Street banks are “telling clients to be ready for a sudden rip higher in the market.” The banks “highlighted the possibility of a rapid, surprise jump in the stock market known as a ‘melt-up,’ driven by investors looking to get in on a positive momentum shift.” (CNBC, May 1). The banks recommend playing the melt-up with call options, “the best risk-adjusted way to add beta”.
  • Several Wall Street strategists increased their S&P target prices simultaneously this week. The most stunning move was a strategist who had the second lowest target, jumped overnight to having the second highest target.
  • Tech “Unicorns” are flooding the market with a huge number of IPOs. The unicorns have incinerated billions of Dollars of private equity money over the last decade, operating in low barrier-to-entry markets with little chance of ever making money. Many unicorns even say this in their prospectus, telling investors they may never turn a profit.
  • Beyond Meat, a company that makes plant-based meat substitutes started trading this week, its stock rose +163% on the first day of trading, making it the best-performing IPO since the financial crisis.
  • The SoftBank Vision Fund, perhaps the biggest private equity fee-generating bagholder scheme of all time, is “considering audacious fundraising plans, including a public offering of its $100 billion investment fund and the launch of a second fund of at least that size, as it looks to seize on an exploding startup scene”. Audacious may not be the best word to describe this plot.
  • Louis Dreyfus, a family-controlled company that has been private for 168 years, is suddenly holding talks with potential investors to sell equity stakes.
  • Almost every major financial media source/website published a “DON’T Sell in May” article this week.
  • Berkshire Hathaway revealed it has finally bought stock in Amazon. Warren Buffett himself regretted publicly years ago that he “missed” the opportunity to buy shares early in the company’s history. All of a sudden the most traditional, disciplined value investor in history has capitulated and bought into the most consensus growth story of this investment era. The decision was likely influenced by his lieutenants, who have been moving towards tech investing in recent years.
  • On May 6 (today) the CME will launch Micro E-Mini futures for the S&P, Nasdaq, Dow and Russell indexes, offering a product for small retail traders to access index futures. Historically, the launch of new futures products have coincided with some major turning points in markets. The most recent case was Bitcoin futures, which started trading December 2017 just five days before the cryptocurrency topped and fell -84%. Other examples include Uranium futures in May 2007, almost the exact day of the top, after which prices fell -88%. Gold futures debuted December 1974 less than 0.80% from the final top, after which Gold fell -44% over the next 2 years.
  • Businessweek magazine just put Microsoft’s CEO on the cover, displayed as a heavenly figure surrounded by clouds, captioned “The Miracle of Microsoft” and proclaiming “The greatest tech company of the 1990s is back!”. Previously, the last stock featured on the cover of BW was Boeing on February 19 2018 (“Up. Way Up. How Boeing seized the sky”), after which the stock spent ten months plunging five different times.

Welcome to Macro Charts!

Look for regular content here soon! Feel free to subscribe if you’d like to receive future posts.

Here is an initial outline with some topics & ideas I might write about more regularly:

  • Single-topic posts such as comparisons between historic market environments, a chart run of a topic I’m exploring, scenarios/probability analysis and risk management.
  • Data analysis & Model discussion using unique and practical datasets I’ve created over the years.
  • Some educational resources. For instance, how I learned to use market indicators more effectively, common myths & misconceptions about markets, and links to relevant academic research.
  • Weekly Summary of my Tweets in a convenient single archive.
  • Short Commentary on a recent market development that could be important (most aren’t).
  • Bigger thematic reviews tying major markets together.
  • Suggestions and ideas received from readers.
  • Stories and experiences from trading global markets over 25 years.

Why am I doing this?

  • It’s a small world and I’m always looking to meet smart people with diverse interests.
  • Keeping a blog diary and reviewing it later on helps improve my process and my thinking.
  • Paying it forward: maybe some of what I’ve learned can help or inspire someone on their own path to success.

Look forward to this new and exciting journey.