2 Trifecta Trade Setups
|Today we want to show you two examples of our global macro process in action. We like to call them “MO Trifecta Setups”. This is how it works:|
The intersection of price and sentiment (with a macro overlay) is our bread and butter. It’s where we live. We wait for a consensus to form, then look for a news failure event (the tape to move contrary to expectations on some anticipated news) or general divergence of the tape, and enter on a given technical setup. If our macro analysis aligns with our contrarian take, we size up.
This is the Trifecta approach in a nutshell.
Two markets are in the process of setting up for a Trifecta trade. In bonds, where speculators are crowding to the short side (see CoT chart of 5yr Notes below). And oil where Managed Money positioning has reached levels that historically precede major bottoms (more on this in a sec).
|Let’s first take a look at bonds. Despite the crowded positioning on the short side, the bears remain in control of the price action.|
Below is a daily chart of 10yr Notes.
|Price closed last week at the bottom of its 10-month sideways rectangle on Friday. It’s trading in a bearish/neutral SQN regime. Price is over 2std below both its 20 and 50d moving averages, so we likely get some mean reversion soon. Nonetheless, this is not a tape we want to start fading yet.|
Citi’s US Economic Surprise Index is over 0.5, meaning economic data is strongly surprising. This favors higher yields/lower bonds. When the time comes to buy bonds, we’ll likely see the CESI chopping around the zero mark or negative.
|The Conference Board’s Coincident Index is still at high levels and more importantly, continues to see consecutive month-over-month gains. This dispels any notion that we’ll see a recession begin in the next quarter.|
|So it’s premature to try fading this move in bonds. The bears are in charge and the weight of the evidence suggests they’ll continue to control the trend for the time being. But over these next few months, we should see a consensus narrative of “higher yields / bearish bonds” take hold. While at the same time, the higher yields will tighten liquidity to the point where our leads begin diverging and we see bonds eventually stop going down on anticipated news events (ie, high CPI prints, strong econ data, etc…) |
This will give us a proper Trifecta setup. And that will be the time to plunge.
A more timely setup is in oil.
Our Managed Money Sentiment gauge has triggered a buy signal (green dots mark past signals).
|Large Net Spec positioning is below the 10th percentile on both a 6m and 5yr OI-adjusted basis.|
|The technicals are shaping up as well.|
|Crude has been trading in an increasingly tight sideways range since March. And despite all the recession talk through the first part of this year, the bears were never able to get a move below $65 to stick. It’s looking increasingly like the previous cycle high of 19’ is now acting as a floor. |
Oil remains very cheap relative to its historical average versus gold.
|Our shorter-term valuation oscillator is at levels that have preceded or marked each of the prior bottoms over the past 8 years.|
|This gives us an actionable Trifecta trade. |
There are a few things that make me hesitant to press this trade hard.
One is Chinese stimulus or the lack thereof. We’ve seen a couple of rate cuts out of the PBoC but China is Japan in the early 90s. What they need is some aggressive fiscal stimulus to steady the economy.
So far, we’re only seeing talk of targeted stimulus and further monetary easing. That’s not enough to cut it this time. And as long as China languishes, this trade is unlikely to have much in the way of legs.
That could change any day though and if it does we’ll be quick to add to our positioning. Second, it still feels like there are too many macro punters trying to nail this one. So despite the bearish positioning, that makes me a bit hesitant. Not enough to not take the trade but enough to make me size less aggressively and be quick to jam up stops if the tape turns heavy.
We’ll see how the trade unfolds and adjust accordingly.
We’ll be watching for this and updating members of the MO Collective along the way. As new data comes in, we adjust our probabilistic scenarios and flow with what the market is telling us. That’s the only way to be a profitable investor.
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Stay frosty and keep your head on a swivel.
|Your Macro Operator, |