TOPS ARE PROCESSES…
No capitulation, no clean setups, and a cyclical top increasingly on the table.
Summary: Trend Fragility is knocking on the door at 22% — need one more push below 20% to trigger a conditional signal, but we’re not there yet. Key word: conditional. Tape and internals still need to confirm. The one bright spot is breadth actually ticked up last week, but that’s a thin reed to hang your hat on. Meanwhile, the options market has flipped fully negative gamma — dealers are now chasing price in both directions, which means expect the moves to get bigger from here. Base case remains that we’re carving out a larger volatile sideways range, with a cyclical top increasingly on the table depending on how the geopol situation develops. As always, the data leads.
QOTW: “The market’s consensus seems to be that 30-50% of Gulf energy infrastructure getting wiped out will have zero lasting consequences. No plastics shortages, no fertilizer crunch, no chip supply issues from helium depletion. The tail risk is so catastrophically bad it can’t really be priced — so the default is just buy the dip and pray everything goes back to normal.” ~ anon
MO Portfolio & Trades
Portfolio fell -234 bps on the week, sitting at +38.76% on the year.
Still running high cash. Core book: long HRW Wheat, long sugar, long corn, long silver, long BBG Commodities ETF, plus a couple of idiosyncratic equity names.
BBG Commodities Index ETF (BCI) is flagging and setting up for another add.
SolarEdge Technologies (SEDG) is a new addition to our book. It recently completed a 12m+ Cup-n-Handle. Solar remains a deeply unloved sector of the market, while the Iran conflict is highlighting the growing importance of energy security. Brandon did a great write-up on solar in his latest report, which Collective members can find hung up in Slack.
4. A few weeks ago, I pointed out how the massive March 20th quarter OPEX ($1.3trn in delta notional), along with the equally large JPM collar trade on the SPX that expires March 31st, had been keeping the market pinned in a tight trading range (one of its narrowest year-start ranges in over 20yrs).
My teammate and MO resident Vol expert, Tony, discusses this idea in length in his latest Vol-Street Journal video (link here). He flags two things worth highlighting: SPX and NDX are both breaking out of their compression regimes on the daily and weekly — and doing it with real momentum. He’s also been watching VIX futures track spot VIX much more closely than they did at the start of the war, which he reads as vol traders not pricing in a quick reversion.
SpotGamma recently made a similar point, writing: “The role of dealer positioning sits at the core of the market’s regime shift. To put it simply, the stabilizing force of positive gamma is now absent.
“We remain firmly in a negative gamma environment, where dealers hedge with price action—selling into weakness and buying into strength. This flips the market’s behavior from mean-reverting to momentum-driven, increasing the likelihood of any sharp directional movement.”
This is important. Expect larger moves going forward.
Trifecta Charts
5. Getting closer… Trend Fragility fell to a reading of 22% last week. Need a cross below 20% to give a conditional capitulation signal.
6. And still no signs of a washout from our Capitulation tab.
7. One bright spot in an otherwise bleak backdrop is our Aggregate Breadth Score actually rose one point last week. This is because this indicator also includes various divergent measures of breadth, as well as nominal.
My base case is that we’re forming what will become a larger, volatile sideways range, which may become a much larger cyclical top depending on how things progress on the geopolitical front.
Macro
8. State Street’s PriceStats MoM% index shows that inflation is going to become a real problem if the Strait isn’t reopened soon.
9. More importantly, if we don’t see resolution soon, recession risk starts getting priced in. Central banks are laser-focused on wages becoming the next inflation problem — but the labor market may not even be strong enough to get there. Meanwhile, unemployment has appeared stable on the surface, but household sentiment tells a very different story. The latest Michigan survey shows unemployment fears at recession-level readings (chart via State Street).
10. From BBG’s Simon White: “A splintering in increasingly fragile sentiment has the capacity to rapidly induce a recession, forcing an abrupt repricing of US rates. Recessions are born on negative feedback loops developing between hard and soft data. Hard data is rising; if soft data also deteriorates past a certain point, then recession risk will rapidly increase.”
Trade Setups / Topical Charts
11. The DXY is consolidating near the upper-bound of its 15-month rectangle pattern, as it caught a geopolitical risk premium bid this past month, which hit when bearish USD sentiment had reached a consensus. With US yields breaking out, we may see DXY follow. We’ll get long on a confirmed breakout (chart via Fidelity).
12. Earlier this month I pointed out the record long Spec positioning in long bonds, along with the bearish technicals giving us a solid short setup. This trade has played out nicely. Now, we have record-short positioning on the front end, along with deeply oversold levels across all timeframes. This move looks overdone to me, as the longer energy prices stay high, the greater the odds of a reflexive recession kicking off.
13. 2s have put in a double bottom on the daily. We’re taking a swing at getting long.
14. Last week, we started dipping our toes in on long spot silver and gold miners. This is a small tactical trade as we test the waters. But there is evidence that we’re getting nearer to a bottom.
SentimenTrader’s Optix crossed below 20 last week. Gold was higher 12m later 89% of the time.
15. Idaho Strategic Resources (IDR) continues to be one of our favorite plays in this space, as it’s one of the few junior gold producers actually making money — strong cash flows, with a clear production ramp ahead. The stock’s cheap on gold alone, but the market is completely sleeping on what could be a massive rare earths + thorium play at Lemhi Pass. Collective members can find Brandon’s write-ups on IDR going back to 23, when he first started pitching it.
Thanks for reading.
Your Macro Operator,
Alex