What's Happening with Market Breadth & Why You Should Care, 🧵

1/ Market breadth is sending mixed signals right now. While $SPY (S&P 500 ETF - blue line) is at all-time highs, $RSP (equal-weight S&P 500 - orange line) is lagging. Only 53% of SPY stocks are trading above their 50-day moving average (SMA). So, what’s going on? 2/ Here’s the twist: the Advance-Decline Line (a key breadth measure) just hit an all-time high too. This suggests more stocks are participating in the rally than you might think.

The dispersion trade: What is it and why should you care? A 🧵

Per Goldman:
"Over the last 5 trading sessions, the realized volatility for the SPX index is ~15 (0.9% daily move)
Over the last 5 trading sessions, the realized vol for the avg SPX stock is ~45 (2.8% daily move)
This 30 vol spread is the highest since November 2020 (election + vaccine efficacy data) ... this 30 vol spread is in the top 10 going back 25 years (GFC, covid, etc inclusive)" What does this mean, in English?

A 30 vol spread between SPX and the average SPX stock is quite extreme historically and signals significant underlying dispersion in the market.

There is a ton of noise on this app at the moment. To help you cut through that, let me share some key points:

1. Long stocks (esp AI/Mag7), short yen and short vol were 3 VERY CROWDED trades coming into this. Many positioning metrics were at/near the 100th percentile in July. These positions will not get unwound in a week
2. Japan has had zero interest rates for over 3 decades. Plenty of time for Yen carry trades to build up (estimates at $4T). Yen strength is causing a negative feedback loop as stops get triggered and overstretched carry positions get unwound. This is rattling positioning in global risk assets

"Never short a dull market"

Yeah, yeah, I know the saying. But what if this is a zombie market? One that looks dead but is about to spring back to life as a flesh-eating monster?

Anyway, IMO the risk/reward of going short here justifies a position. I'll explain...

a 🧵 1) The S&P hasn't been able to make any progress at the trendline from the ATH. This coincides with the 1.618 extension from the July highs to the Oct lows

I'm not a "macro trader" (I leave that to experts like @INArteCarloDoss @PauloMacro, and others who are very good at it)

I've never held myself out as a macro trader/expert, but I DO study macro. So how do I trade, why do I study macro, and how do I use it? First off, I'm a technical trader. I exploit technical setups that give me a probabilistic edge.

Price is always doing one of 3 things:
- reverting to the mean
- accelerating away from the mean
- consolidating

I seek specific circumstances across these conditions

I prepared a deck to help some of my members understand the #bigflip framework as postulated by @INArteCarloDoss

Sharing here for those interested

1/4

Things I could buy instead of a Bloomberg terminal subscription

1. One case of Luciano Sandrone Le Vigne Barolo, every month 😃 2. A brand new Pinarello Dogma F, every year! 😃

If the dollar is set to rally from here, what does that mean for inflation? A short 🧵

Conventional wisdom holds that if the dollar rallies, US inflation will fall. A good narrative, as the US is a net importer, and imports become cheaper when the dollar strengthens

BUT...
1/8 ...but note how in 2022 the dollar peaked right at the same time as core CPI peaked. Sometimes narratives don't work so well

2/8

The vast majority of the statistics you read regarding the stock market are plagued by small sample fallacy and/or gambler’s fallacy

With that disclaimer out of the way, here’s the “January Barometer” explained

1/4 The performance of the S&P 500 in January has predicted the year’s course with 72.2% accuracy since 1950. “So goes January, so goes the year”

15/18 of pre-election years followed January’s lead

2/4

Since 1928, the S&P 500 has only posted back-to-back negative years on 4 previous occasions

So that makes another down year in 2023 highly unlikely, right?

Well, maybe not (a short 🧵) The first time since 1928 the S&P posted consecutive down years was 1929 to 1933

It happened again in 1939-41

Then again in 1973-74 and again in 2000-02