In this week’s Dirty Dozen [CHART PACK], we look at bear market breadth, German swap spreads breaching Lehman highs, indications of plunging forward EPS, and reasons to expect a change in the risk premium going forward. We then dive into demand for solar, a parallel play on that trend with highly asymmetric potential, plus more…

1. This week’s summary of BofAML’s Flow Show (emphasis by me).

2. Europe is at the mercy of the weather this winter. Let’s pray it’s a mild one… 

3. @MacroCharts shared a good writeup last week where he gave his view on the path forward for equities. He and I seem to be in the same camp, that camp being that we’re in a cyclical bear with more downside ahead. Although, my short-term tactical view shifted bullish last week. You can find the piece here.

4. The year-to-date selloff has been due to higher rates, not concerns over growth. Here’s MS (emphasis by me) “Our more pessimistic view on the S&P 500 index is based on analysis that indicates all of the 30% de-rating in the forward S&P 500 P/E that occurred from December to June was due to higher rates. We know this because the equity risk premium (ERP) was flat during this period.. Meanwhile, forward NTM EPS estimates for the S&P 500 have come down by only ~1.5% and P/Es are now ~8% higher. With rates now ~30bp below the June highs, the ERP has fallen once again, to just ~285bp. This makes little sense, particularly given the significant slowdown in earnings we think is still to come.”

5. But we should expect the EPR to tighten, considering that earnings growth is headed for the floor over the next 12 months (chart via MS).  

6. MS forecasts a significant decline in EPS, writing “the growth spread between our Non-PMI Leading Earnings Indicator and bottom-up consensus forward 12-month EPS growth has rarely been this low. We find it compelling that breaches of -15% in this spread have coincided almost perfectly with major tops in forward dollar EPS.” 

7. The above gives good reason to be cautious longer-term. But in the near term, the path of least resistance is up (as long as yields don’t spike too quickly here). Our Trend Fragility indicator, a composite of sentiment and positioning data points, is in the sub 10%’tile of its 3yr average. These levels tend to lead to strong 0-3 month returns.

(Click on image to enlarge)

8. The world is building a lot of solar… read the following from this BBG piece “The solar boom of the past two decades has left the world with a cumulative 971GW of panels. The polysilicon sector is now betting on hitting something like that level of installations every year. Generating electricity 20% of the time (a fairly typical figure for solar), 940GW of connected panels would be sufficient to supply about 5.8% of the world’s current electricity demand, and then another 5.8% next year, and the next. That would be equivalent to adding the generation of the world’s entire fleet of 438 nuclear power plants — every 20 months.”

9. The solar ETF (TAN) has been on a nice run since the start of the year, breaking out from its 18-month consolidation.

(Click on image to enlarge)

10. I’m not particularly interested in playing solar directly. But, it just so happens that silver is a major component in making photovoltaic cells. And if you’ve been reading our work for the past month, you know we’re quite bullish on gold and silver looking out over the next 2-3 years.

Read this great thread from @aschmidt2930 on silver’s developing fundamentals.

11. @contrarian8888 points out that silver lease rates have gone vertical. This is going to feed into higher prices soon.

12. There’s a number of ways to play this. You can start building a position in the futures. Just understand that PMs will tend to sell off with equities in the first half of a cyclical bear market. So size accordingly. We’re also looking to add some DOTM calls on SIL and/or AG. You can read more on how we execute our DOTM strategy here.

(Click on image to enlarge)

More By This Author:

Gold Miners Trading At Dirt Cheap Prices
100% Recession Odds
Calling A Life Audible