“My fear of the markets has forced me to hone my timing with great precision. When I am trading properly, it is like a pool player running racks. If my gut feel of market conditions is not right, I don’t trade” ~ Mark Weinstein

In this week’s Dirty Dozen [CHART PACK]  we look at conflicting (noisy?) macro data, a new low in bearish sentiment, another rare breadth thrust signal, bad liquidity, options markets driving equity markets, and a long E&P small-cap trade, plus more… 

1. Some highlights from BofA’s recent Flow Show.

2. B&B fell again to 0.4 last week, it’s lowest reading since June of 2020… 

3. A 100% YoY increase in the price of oil tends to precede (partly cause) bear markets. 

4. The small-cap space has some of the more constructive charts around right now. There’s a lot of great setups and value to be found if you know where to look. We’ll be writing about a few of our favorites later this week. 

5. Another breadth thrust via the great twitter follow @mark_ungewitter, who shared: 

“Just one additional case since 1965 in which 80% UVOL followed within three sessions of triple 80% UVOL: October 11, 1982. 

Worth noting that frequency of 80% UVOL nearly doubled post-2001, probably due to decimalization, high-frequency trading, and/or popularity of indexing.”

6. So we have a solid contra signal in bearish sentiment and positioning, valuations which have compressed, and consecutive breadth thrusts following capitulatory selling. This is a recipe for a multi-week rally. The only missing ingredient is liquidity, which remains abysmal. For a durable bottom we need yields to settle down.

7. @IanRHarnett shared this great chart showing US CEO Confidence as a lead on profits. No doubt we’re headed for an earnings slowdown of some sort. What will matter is whether we get an earnings recession or just a deceleration. My money is on the latter but these noisy macro times call for weak opinions.

8. While CEO confidence may be in the dumps, the Philly Fed State Coincident Index is as good as it gets, showing increasing economic activity across all 50 states. We’ll see this one start trending down weelllllllll before any economic recession.

9. @MrBlonde_macro published a post over the weekend that’s worth a read (link here). Here’s a chart and a snippet. 

“The equity valuation compression in the last 6mos is meaningful and now finds itself in pre-covid average range of ~15-18x.  Is that too high? Probably given macro conditions of inflation and fed rate hikes, but its also come a long way from 22x late last year.  Also notable, at least from tactical trading standpoint, is valuation undershot the -2 sigma band by an amount similar to past corrections which brought a pause in the pain.”

10. Kris Sidial, aka. @Ksidiii on the twitters, is one of the very few guys I trust for help with deciphering what’s truth and what’s BS when it comes to the world of volatility (ie, gamma, vanna, charms, and whathaveyous…). He recently shared with me a paper he and his team at Ambrus Capital put together titled Volatility and the Changing Market Structure Driving U.S. Equities. Here is the link and a graph from the report. It’s a must read.

11. Crude (Dec 23’ contract pictured here) looks like it’s entering a parabolic run. It remains in a Bull Quiet regime. Speculative positioning is coming off low levels. Seasonality is good. And China opening back up doesn’t hurt. We’ll be adding to our position on pullbacks and consolidations.

12. Laredo Patroleum (LPI) is an Oklahoma based E&P that trades for roughly 3x next year’s earnings. The chart below is a monthly. It recently completed a 3-year cup-n-handle.

Thanks for reading.

Stay frosty and keep your head on a swivel.