“When we work backward from results to figure out why those things happened, we are susceptible to a variety of cognitive traps, like assuming causation when there is only a correlation, or cherry-picking data to confirm the narrative we prefer. We will pound a lot of square pegs into round holes to maintain the illusion of a tight relationship between our outcomes and our decisions. ~ Annie Duke, “Thinking in Bets”
Q1 2021 hedge fund letters, conferences and more
Good morning!
In this week’s Dirty Dozen [CHART PACK] we look at structural headwinds to inflation, go through some market indicators suggesting more chop and vol ahead, then dive into a number of great charts, setups, and finally end with a profitable high growth cannabis company with great technicals…
Let’s dive in.
- “In past cycles, 1994, 2004, and 2011 were comparable years. We think that 2021 will be similar for investors – flattish returns for the year with a 10-20%+ correction along the way. During such periods, the game is to be more selective with one’s investments and even more tactical with the rotations under the surface… Finally, remember that we’re still only a year from the trough in the recession, and new bull markets tend to last for years. So, whatever correction the market experiences this year, we are likely to make higher highs next year.” via MS.
- “It’s hard even to imagine a wage-spiral tail risk. It would take steady wage gains of 10-12% to push inflation to the levels of the 1970s & 80s, and the US economy is structured very differently today. Non-elite unions are politically toothless. Technology penetrates every industry. The offshoring of more services is coming.” via BofA.
I agree with this take in regards to stickier secular inflation though I believe cyclical inflation will be more persistent than many are expecting.
3.Our Nervous & Numb Indicator (developed by a fellow Collective member) did a good job foretelling this recent bout of market weakness. The indicator looks at divergences between the market and the VIX through a unique lens. A high reading means the market is getting nervous, a low one means it’s numb.
- Our TL score fell to a low of -5 last week, which is quite bearish. It was quickly reversed and ended the week at -1, thanks to a rebound in breadth. But as you can see in the chart below, the TL has been steadily negative over the last 2-months. This is not a good look and while markets could very well jump and run to new highs, the trend is getting heavy and unlikely to last much longer. An extended corrective move (1-3 months in duration) is around the corner.
- The market is trading rich too. The SPX’s FCF to UST 10yr yield spread has been driven back down to near its January 18’ cycle lows.
- This chart shared by @Soberlook shows the gold/copper ratio minus its 2-year average is indicating extreme complacency.
- So we shouldn’t be surprised to see the reflation trade take a breather within the next couple of months. At which point, precious metals will really accelerate into their next major bull leg.
8.The tape in both gold and silver show classic Bull Quiet regimes where the price keeps climbing the stairs of sell setup failure.
- In addition to PMs, there’s a number of great trends underway in the FX space. Short USDBRL is one of the pairs that is setting up for a new regime (chart flipped below).
- Comstock Resources (CRK) popped up on our compression screen. The chart is seeing tighter and tighter oscillations within a 5yr+ wedge. This type of tape typically precedes large repricings. We’re digging into the fundies this week.
11.Not a chart but a great succinct summary of the current macro environment from one of my favorite macro guys on Twitter (@MagnusMacro).
- I’ve been working on a deep dive into the cannabis space for the last 2-weeks. I’ll be publishing the report today or tomorrow. It’s taken me longer than expected to get out because I’ve come across an equity play on the theme that offers the most asymmetric setup I’ve come across since our Micron (MU) DOTMs last year. I’m excited to put this trade on our books.
Anyways, there’s a number of great tapes and values in the space. Canadian listed US MSO GreenThumb Industries (GTII: CSE) is one of them.
Stay safe out there and keep your head on a swivel.
Article by Macro Ops
