Citadel shared its bull case last week, which we at MO are largely in agreement with.

Too many people are focused on the weakening labor market, which is lagging and needs to be viewed in its proper context (policy shock, immigration, AI etc...)

Growth leads point to reflation, not recession. It’s tough to have a recession when the fiscal deficit is large and growing (which it is) and household/private sector balance sheets are in good shape (which they are). 1/ 2/ The short-to-intermediate bull call is tougher now than it has been over the past five months, with positioning and sentiment slowly starting to catch up to price action. Citadel points out that their retail clients have been “Net buyers in 21 of the last 24 weeks, rebounding after April weakness.”

The tape and macro conditions continue to be supportive of higher prices over the near term.

BofA’s Bull & Bear Indicator is just a few points from triggering a buy signal... 1/ 2/ Our Trend Fragility indicator (a composite of sentiment, positioning, and flows) hit a low of 11% a few weeks ago, which is just 1% away from the 10% needed to trigger a classic buy signal.

My base case is we’re in a primary bear market and we should enter a recession in the latter half of this year, though odds say we should see a continued bullish counter-trend move over the coming weeks... 1/ 2/ With that said, looking at charts like those below makes me uneasy about my bearish bent.

Sentiment and positioning remain very depressed. Last week’s SIVB freakout likely marks a near-term low.

Market internals (Cyc vs Def, Semis v SPX, etc.) are not leading to the downside. They’re either leading up or trading in line with the market. That’s not bearish... 1/ 2/ The Russell chart is broken because of the knee-jerk reaction in financials last week following the SIVB news. It’ll be important to see if IWM can retrace that damage this week.

But Qs and SPX remain constructive as long as they can hold their current levels.

The SPX has only two trading days left in the month to see if it can turn its monthly bar around and close in the green. As of now its not looking so good.

Also, the chart is coiling in a tight 10-month range. Compression regimes lead to expansionary ones (aka. Big trends)... /1 2/ We’re fairly neutral in our short-to-intermediate term outlook. So we’ll wait for the market tip its hand on this one. Bonds will be the tell. If they can’t hold a line, then neither will stocks.

Our weekly Nervous & Number Indicator, which is a measure of the relative changes in SPX and the VIX, looks like it’ll trigger a sell signal this week.

Red circles mark past signals... /1 2/ For those who think we’ve started a new cyclical bull market... NOPE.

You don’t have cyclical bottoms when aggregate median valuations are in the 88th percentile and the Fed is still in the midst of its most aggressive hiking cycle in decades:

SPX is short-term overextended and at resistance (it’s upper weekly Bollinger Band + a significant monthly level that has rejected price since last Spring).

We believe it'll punch through, but we’ll likely see a small pullback or consolidation first, so expect some chop and vol. 2/ Key to watch: Momentum and short-term breadth indicators such as those below. These collectively signaled failed bullish breakouts on each of the last market advances over the past year. They are strong for now, but we’ll have to see how they hold up in the week ahead.

I don’t so much care about trendline breaks or trendlines in general, though the market sometimes does.

A number of developments make it high odds the market continues to run. Here's our expected target for the $SPY, roughly +12% above current levels... 1/ 2/ One interesting development is the large improvement in longer-term breadth indicators. Many are starting to look as if the cyclical bear is already over. We this does support our bullish view over the next 1-3 months.

Yields are headed higher for longer.

Below are various expectations for the Fed Funds rate. The Fed’s SEP forecast is the most hawkish (magenta line) and the consensus is in green. We think the Fed is closer to being right than the others and we’ll see higher for longer rates. 2/ This table shows the 3m annualized sub-components of the CPI, where we can see that the largest detractors to inflation over the last four months have been energy/fuel related.

A number of high signal breadth thrusts triggered last week. This is bullish for equities.

It’s our view that we’re in a broader topping process, but after last week, there's a possibility of a run at the prior Jan highs.

This would be 20% above current levels... 1/ 2/ Here’s NDR’s version (slightly more relaxed parameters) of Deemer’s BAM signal, along with historical returns.

According to @WalterDeemer the BAM has only triggered 25x since 1945. And the more rare an event the greater its signal value (chart via @_rob_anderson)

Gold is cheap.

Via BofA: “Net 21% say gold undervalued in Dec, most on record.”

The only other two similar readings (Jan 09’ and Sep 18’) coincided with major lows. 1/ 2/ Crescat Capital shared a good update on precious metals over the weekend: crescat.net/mining-industr…

New secular regimes are just starting.

New leaders, new losers, a new game... 1/ 2/ More signs of a changing regime?

MSCI World ex. US saw its largest month of outperformance against the SPX in November.

This bear market rally is running out of gas...

Back in October, we pointed out the positive divergence between Cyc v. Def and the SPX, suggesting we should be open to a bear market rally beginning soon.

The rally played out, but now this lead is rolling over. 1/ 2/ If it keeps trading down, then it raises the odds this bounce is done.

Another troubling sign is the lack of confirmation from Discretionary/Staples.

To turn decidedly bullish, we would need to see this lead turn up.

Speculation requires a focus on form and technique.

Martial arts are instructive of this.

Much of martial arts practice is the execution of Kata, a Japanese word which literally means “form.”

Via Wikipedia: 1/ 2/ The more that form and technique are perfected, the more that proper reaction becomes intuitive.

As such, martial arts are grounded in the concept of automaticity, by which your mind, body, and muscles use hard-wired routines to execute complex patterns on command.

We're currently awash in competing narratives, contradictory data, and biased hot takes. Getting caught up in this flow of noise is detrimental to one's peace of mind and P&L.

In cyclical bear markets it pays to narrow our focus and shorten our timeframe... 1/ 2/ There are only a few things that matter right now:

-- We're in a cyclical bear market with high recession risks in the 2nd half of 23'.

-- Financial conditions and measures of long-term breadth support the idea that we're in a continuing cyclical bear market.

Crude oil is breaking lower from its recent range after failing to take out its last pivot high.

From a pure price action perspective, this is to be expected if you pull back and look at the monthly chart.

But this move lower is only temporary... 1/ 2/ Crude put in four consecutive monthly bear bars followed by a very weak bull bar (candle closed below its middle) in October.

So it’s typical to see another leg down (a 1-2 correction) before the uptrend continues, though I expect this leg lower to be much shorter.

The bear market rally that I said was odds on back in early October is still underway. And there is now even more reason to expect a run higher into the end of the year. /1

https://twitter.com/MacroOps/status/1577012004459794437

2/ R2K has put in a double bottom on the monthly chart and is now crossing above resistance at the 1,900 level.

I'm looking for a run-up to the BB midline around the 2,050 level by the end of the year **as long as bonds hold their recent floor**

Market returns follow a power law.

Similar to Pareto’s law, returns adhere to an extreme distribution of 90/10.

This means that amongst great traders and investors, 90% of their profits on average, come from only 10% or less of their trades. 1/ 2/ The following is from Ken Grant (who’s worked with traders such as Cohen, PTJ, et al.) in his book Trading Risk:

Out of the major US indices, R2K has the best-looking monthly setup.

We've got a strong close on highs with a potential double bottom in place.

A monthly close above 1,900 would be a significant risk-on signal. 1/ 2/ Small caps are cheap, both on a nominal and relative basis.

"Macro capitulation, investor capitulation... cash levels 6.3% = highest since April'01, investors now 3sd UW equities... relative to FMS +20-year history investors are 2.6sd OW cash and 3sd UW equities..." ~ BofA FMS /1 2/ ST read: sentiment/positioning has set the conditions for a bear market rally. Leads such as Cyc vs Def r pointing higher. Breadth is recovering from oversold levels, & the market is ripe for technical reversion

Still need bond vol/yields to settle & breadth thrust to confirm

There is a paradox inherent to successful trading.

You must develop a deep sense of confidence in your methodology and talent, yet remain humble and flexible.

You have to trust yourself, but also know when to intelligently doubt your conclusions & be open to being wrong 1/ 2/ You need a profound unshakeable faith in who you are and what you can do… while at the same time maintaining the attitude of the humble student, the raw beginner, the white belt always ready to learn...