The Macro Ops Process Explained

The Macro Ops Process Explained

Hey ,

One of the things I love about markets is that there are so many ways to skin the cat. Some are technicians, they draw lines on charts and look for patterns in the tape. Some are fundamentalists, they pore over financial statements to derive “intrinsic value” and compare it to the market to see if there’s a mispricing. Then there’s quants who systematize edges, momentum traders who chase, well, momentum. Even astrologists who buy TSLA if Saturn is in alignment with Uranus or whatever… These people are all playing the same game but from different angles. And they can all win (except for maybe the astrologist, not too sure about them). The only thing they need to have in common is a verifiable edge. A process that produces positive expected value, aka. +EV (we’ll talk more on that in a future note). While most investors pigeon hole themselves to a certain dogmatic approach, limiting the set of tools at their disposal. We at MO prefer to be effective Generalists. We ruthlessly test what works and what doesn’t from each and every method. Keeping what improves our +EV and discarding what doesn’t. This is a combinatory approach to markets using a quantitative and qualitative process of triangulation. We call it the Trifecta Approach in a respectful nod to the Market  Wizard Michael Marcus who helped popularize it — though make no mistake, this is the method used by many of the greats, from Livermore to Kovner to Soros and Druck.

Using a deep understanding of macro fundamentals to identify cyclical trend location, sentiment to spot intermediate-term price dislocations (+EV entry/exit points), and technicals to ruthlessly manage risk. We’re able to stack conditional edges upon edges upon edges… producing a vastly more asymmetric process for tackling markets. Not to mention, it allows us to more effectively adapt to various cycles and market regimes. This is the philosophical basis for how we think about investing. Within this broader framework, we run a number of different strategies. All of which have their underpinnings in the Trifecta Approach. SQN & TL SCORE: At MO we’re big into trying to quantify the investing process as much as possible. There’s a sweet spot with quantification. If you go too far you lose flexibility and any edge you uncover will eventually be arbitraged away by machines. If you don’t hard code your process at all, then you’re liable to fall victim to your emotions and poor judgment (something we ALL suffer from). Not to mention you risk drowning in all the noise that’s inherent in financial markets. Two of the main tools we use to do this are the System Quality Number (SQN) that was developed by Dr. Van Tharp (you can read more about it here) and the Trifecta Lens Score (TL Score) that we built. Here’s a snapshot of what the indicator looks like. The SQN tells you what type of regime you’re in, statistically speaking. Knowing what regime you’re in, you can make +expected value judgments about what the market is likely to do at each point in time.

The strength of the line A good way to think of market breadth is like an advancing military force. Strong breadth is similar to an army with a deep and disciplined line (think of old school battles where fighters stood shoulder to shoulder). That line has strength and weight behind it. It can move and push through barriers. On the other hand, when the line is thin and begins to fracture. It doesn’t take much from the opposing force to break it completely. This is how major trend changes happen. Each issue in an index is equivalent to a soldier standing on that line. And that is what various indicators of breadth aim to measure. The three breadth indicators used in our Trifecta Lens are: 1. NYSE New Highs / New Lows Index 2. Russell 3000 % Advancers 3. SPX % > 50dma The conditional statements used for each one is: 1. If 30dma trending down & Index < 0.5 = -1. If trending up & Index > 0.5 = +1. If sideways = 0 2. 2. RAY % Adv (20dma): If < 50 = -1. If > 50 = +1. If = 50 = 0 3. SPX % > 50dma: If < 50 = -1. If > 50 = +1. If < 10 = +1 We add these together to get a Breadth score. The score ranges between -3 and +3 with -3 indicating very negative breadth and +3, the opposite. The strength of the current Liquidity can be thought of as the trend in demand for risk. It’s best measured by tracking what’s going on in the credit markets. Since, as per our Hierarchy of Markets framework, credit markets are smarter than equity markets and more often than not, sniff out major trend changes before they show up in stock indices. The three liquidity indicators used in our Trifecta Lens are: 1. Baa Yield z-score (50d) 2. LQD/IEF 3. Stock and Bond Ratio z-score The conditional statements used for each one is: 1. W/in prior 30-days: If < -2 = +1. If > 2 = -1. If between = 0 2. W/in prior 14-day divergence w/ SPX: If > (positive divergence) = +1. If < = -1. No divergence = 0 3. W/in prior 30-days: If < -2 = +1. If > 2 = -1. If between = 0 The yin and yang Exuberant sentiment and crowded positioning are behind nearly every major market selloff. Overly eager investors out over their skis are what sows the seeds for a reversal in trend. It’s what drives the fractal risk-cycle and why there’s an embedded yin & yang flow to markets. You can read more about how we think about sentiment here. The three sentiment indicators used in our Trifecta Lens are: 1. Total Put/Call 10dma 2. z-score 3. AAII Bull-Bear The conditional statements used for each one is: 1. W/in prior 30-days: If > 1.1 = +1. If < 0.85 = -1. If between = 0 2. W/in prior 30-days: If < -2 = +1. If > 2 = -1. If between = 0 3. W/in last 30-days: If < -20 = +1. If > 20 = -1. If between = 0 We add the Breadth, Liquidity, and Sentiment scores together once a Setup point has been observed. The cumulative points give us a final score which ranges from -9 to +9. The tape tells all… A Trigger is a setup bar that leads to an action; an entry, exit, add to, or reduction of a position. We’re not going to dive too much into this concept today. We’ll leave that for another time. But essentially, it’s an additional and critical contextual point that precedes a trading action. For instance, it could be a strong bullish reversal bar after a Setup is hit in a bull trend when the Conditions signal a high probability of trend continuation. And vice-versa, it could be a bearish Putting it all together Let’s now go through some Setups and see how this framework would have kept you in the trends and out of the crashes.

Beginning at the bottom of the December 2018 selloff when everyone was talking about recession, the inverted yield curve, and trouble in China. The Trifecta Lens gave us a score of +3. Any score from zero and above is bullish, so a positive three is a very strong reading. This reading was followed the next day by a large bullish reversal Trigger bar.

In March 2019, when everyone was calling the rise off the lows a bear market rally and pointing to indicators of a global recession. Our Trifecta Lens gave us a score of 0 on the March 18th Setup. Again, this is a bullish score and it was followed the next day by a bullish reversal Trigger bar.

Nearly two months later we got another setup. The narrative was the same: inverted yield curve, China recession, liquidity issues, yadda… yadda… yadda…. On the May 7th Setup, we got a reading of -1. This is a bearish reading indicating there’s a higher chance of downside follow-through — which is exactly what we saw. But it’s not an extremely bearish reading, one that would normally precede a major selloff or change of trend. Those typically occur at -3 or below.

Four weeks later, the selloff concluded with a reading of 0 followed by a large bullish reversal Trigger bar.

Towards the end of July, the whole Repo Rate Hysteria began kicking up, feeding the bearish machine. This, of course, was a bunch of nonsense. Anybody who knew even a little bit about how the financial plumbing works, should have known that. Regardless, it didn’t even matter, because the Trifecta Lens would have told you to stay long the trend. In the July 31st Setup, we got a reading of positive 2. There wasn’t an immediate bullish follow-on Trigger bar, but it at least told you that the odds favored a minor pullback over the bear market everyone was predicting. All you had to do was stay long and wait for a bullish Trigger to enter or add to your position. And there you have it… That’s the Trifecta Lens for assessing the strength and durability of trends. This is just one way to codify a framework for building context. And this framework, or something similar, doesn’t need to be quantified (though, the more systematic you can be in your approach, the better). I can quickly eyeball all these indicators and decision tree them in a matter of seconds and arrive at the same place. The important part is that we use the entirety of the framework;the Tape, the Breadth, the Liquidity, and the Sentiment to build a contextualized picture of what’s really going on in the market. This prevents biases from creeping in, clouding our judgment, and leading to emotionally reactive decision making. Now, this framework isn’t a crystal ball. It doesn’t make predictions. It just gives context. Very valuable context that allows you to constructively assess the odds and probabilities. It empowers you to be proactive and not reactive to market moves. Risk aversion and fear of the unknown are direct symptoms of a lack of context and are the polar opposites of audacity. ~ Pete Blaber In the Macro Ops Collective, we use this holistic approach to outperform.  If you want to increase your efficiency and analytical advantage by using our custom dashboard full of proprietary tools and data, then consider joining our team. The Macro Ops Collective is our premium membership that’ll help you cut through the noise and focus on the few critical risks and trends that matter.  Joining will give you access to our institutional-grade research, unparalleled training and tools, and unique community of dedicated traders and investors. We trade real money while tracking and sharing our verified results. You’ll get everything you need to consistently win in the markets.  Members of our Collective include legendary big-name investors, up and coming hedge fund managers, and die-hard retail traders of all stripes. The one common denominator we all share is a deep love and respect for this game. Our mission is to create a positive feedback loop for our community: More learning —> More sharing —> More profit —> More resources —> More learning —> and so on… If you’re interested in hearing more about the Macro Ops Collective, just click this link to schedule a free consultation call with us.  Click here to schedule a free consultation call.

Your Macro Operator,  Alex Barrow https://macro-ops.com

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