He whom the ancients called an expert in battle gained victory where victory was easily gained. Thus the battle of the expert is never an exceptional victory, nor does it win him reputation for wisdom or credit for courage. His victories in battle are unerring. Unerring means that he acts where victory is certain, and conquers an enemy that has already lost. ~ Sun-Tzu, The Art of War

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at the near-term technical picture for the SPX and then we analyze the valuation hurdle coming for the US market, followed by a look at multiples around the world and then we make the bull case for Europe. Plus more…

1. Last week was an interesting one for the SPX price action-wise. Let’s start with the daily chart below. Monday, the SPX broke below its 8-week tight bull channel (red highlight) after breaking above the upper trendline of its larger 6-month bull channel (green highlight) creating a bull trap false breakout, only to selloff down to the top of its even larger 22-month broadening top trendline (shown on weekly chart below) before reversing and ripping higher, back above the 6-month bull channel trendline right up against the bottom line of its micro bull channel, and ending positive on the week.

1. Here’s the SPX chart on a weekly basis. See how we sold off last week down to the upper line of the larger 22-month consolidation zone. And then bulls aggressively took back control and ripped the market higher into the close for the week.

I admit I was expecting more follow-through from this move in order to reset the indications of short-term complacent sentiment and positioning that I’m seeing. And, though we may still get another leg down this week, the odds are now back in favor of a continuation of the bull trend. Action like this represents incredible strength in demand — this is not the type of tape you want to aggressively short. And when you combine this with the fact we’re moving into one of the most favorable periods of seasonality and nearly the entire fund manager space, who has grossly lagged the market year-to-date, will likely be chasing hard into the end of the year… well, the next few weeks should be fun.

1. Looking further out though into 2020 the SPX is going to be fighting some decently strong headwinds in the form of stretched valuations absent a visible driver of earnings growth. The below chart from Goldman Sachs shows the year-to-date rally has been almost entirely driven by valuations rerating higher. Over the longer-term, this is unsustainable — especially in the US where valuations are already high. Either earnings growth will need to pick up materially or equities will hit a wall.

1. The SPX’s forward PE is back over 18 and nearing the cycle highs it reached back in Jan 18’.

1. The world as a whole isn’t as dear, though it’s not exactly cheap either. The MSCI World index currently trades for 16.1x next year’s earnings. The blue line shows that global earnings growth has essentially been flat for 18-months and counting.

1. Some markets are trading much cheaper than others. A few of my favorites at the moment (based on technicals, macro, and value) are Malaysia (EWM), Russia (RSX), and Chile (ECH).

1. Last month I pointed out how the MSCI Chile ETF (ECH) had sold down to an area of significant long-term support. A level that had marked major bottoms in the past. The chart below is a weekly and shows that ECH completed a double bottom pattern after finishing the week strong on a bullish reversal candle.

1. We’ve been talking quite a bit lately about the vol compression regime that G10 dollar pairs are in and how compression regimes like these tend to lead to expansionary ones (ie, major trends). Well, currencies are driven by speculative flows and spec flows chase relative total returns. The reason why the dollar continues to perform well is because the US continues to perform well on a relative basis.

I’m watching Europe and the EURUSD closely though because if investors are starting to return to the continent after a long hiatus then this could have big implications for the USD. A big positive for this trend is net equity supply, which has gone into reverse and is now shrinking. Remember, buybacks have been the primary driver of the US equity market over the last couple of years (chart from Goldman Sachs).

1. And not only are European company’s showing increasingly positive earnings beats over the last 2-quarters but earnings momentum there is starting to beat the US for the first time in a LONG while (chart via UBS).

1. Economic growth seems to be stabilizing (chart via MS).

1. This chart from Goldman Sachs shows that the aggregate 10-year rolling average of sales growth has been steadily declining for the last 7-years — at least until very recently.

1. Congrats everybody, we did it! Global debt has surpassed the $255trn mark for the first time ever. Remember, absolutely none of this matters because… MMT ***strong sarcasm voice***.

Alex Barrow

Co-Founder of Macro Ops, Global Macro Fanatic, Former U.S. Marine Scout Sniper & Intelligence Professional