Preconditions For A Bottom… – ValueWalk Premium

Preconditions For A Bottom…

When the time comes to buy, you wont want to… ~ Walter Deemer

Q4 2021 hedge fund letters, conferences and more

Good morning!

In this week’s Dirty Dozen [CHART PACK] we look at yields and equity returns, go through the big 3 (sentiment, positioning, technicals), check out the latest BofA FMS findings, and more…

  1. All else equal, rising yields are a headwind for stocks. Fast rising yields even more so. Fast rising yields and richly valued stocks makes for a dangerous coctail as we’ve seen this past week. This chart from RenMac shows that the 10yr’s “Impact” (level + rate of change) on equities is in the 100th %tile which historically leads to low-to-negative forward equity returns.

  1. For a defensible bottom we want to see a few things (1) scared sentiment (2) positioning washout (3) oversold technicals.

The table belows shows we’re seeing signs of 1, with AAII hitting lows last seen during the COVID bear market bottom. And our weekly Nervous & Numb indicator is nearing a major buy signal. But, positioning is still quite long with Specs actually increasing their longs last week and flows and HF positioning still at incredibly stretched levels.

  1. Here’s each sector’s breadth (% of issues trading above/below 50dma). Tech, Real Estate, and Consumer Discretionary are now in deeply oversold territory.

  1. Extremely rich US valuations make things more tenuous.

  1. According to the latest BofA FMS, fund managers haven’t been this light in tech since Dec 08’.

  1. While they have their highest allocations to cyclicals on record

  1. Which is interesting considering growth is slowing and expected to continue to do so, which is typically not good for value and cyclicals… (chart via this great post from @MrBlonde_Macro).

  1. Despite the recent vol and rise in rates, financial conditions remain near historic lows.

  1. Price is always acting under the influence of two opposing forces at all times (1) trend/momentum and (2) reversion to the mean. The Qs are trading 10% below their 50-day moving average. This marks a deeply oversold level and we should see some reversion back to trend over the short-term at least.

  1. Eurodollars have completed a massive H&S top…

  1. Our Summary Predictor tool looks at historical combinations of price patterns and SQN market regimes to give a 10-week projection of average follow-on returns. You’d never trade off something like this alone as it’s just meant to give additional context. But, Natty (bullish) and the Nasdaq (bearish) standout as the markets of note.

  1. I’ve been driving up to Alaska this past week which is why I’ve been MIA. For those interested, the drive is brutally long and the weather (surprise gale force winds and temps that regularly fall below -40℉) make for some interesting driving at times. But, the views make it more than worth it (some pics below from the road). Plus, in the winter you pretty much get the road to yourself, which is great.

I’ll be living and working out of a cabin in Anchor Point for the next 6-months or so. Looking forward to getting plugged back into markets here in a couple more days. Don’t break anything in the meantime!

Thanks for reading.

Stay safe out there and keep your head on a swivel.

Article by Macro Ops

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