This section occasionally used to display sample reports.
Saturday, November 5 2016
Archaea will be closing ALL Short Equity positions early next week (initiated in mid-August), looking for a bottom in the market of unknown magnitude and duration (discussed in detail throughout the report). At a minimum we look for a 2-3 month rally. Depending on how oversold Equity markets get next week, possibly a significantly larger rally. Such a rally would very likely be worth getting long, given the alignment of what we are seeing in our model work as well as market behavior.
Once the Short Equity book is closed, the updated portfolio will look for Long Bias in selected sectors (listed in today’s review) – and more importantly, Short Volatility – this is a Key Call which Archaea intends to allocate a core position and hold at least until year-end. (Note Archaea is maintaining its Short Commodity Equity positions because the Industrial Metals are very likely close to peaking, and the Dollar close to completing its pullback.)
Below, Archaea’s Core Risk Model 1 topped with the market in August and is now extremely compressed. It’s below the Brexit bottom, which at the time led Archaea to issue a warning not to press shorts. The last two days have dropped vertically to one of the model’s lowest values in history. This is completely unsustainable. The model is firing a major buy signal, indicating a tremendous amount of energy is being stored for a sharp rally. Archaea strongly believes a buyable Equity market bottom is imminent. Rally duration cannot be estimated at this time, but the historical expectation is at least one month for the model to unwind back to the top of its historical range. More likely 2-3 months. Either way this will cover the remainder of 2016 business and as such, should be given high priority. We don’t say it lightly – such a rally could make or break a lot of funds’ performance year.
Equity Implied Volatility appears to have priced in virtually ALL of the election uncertainty regardless of the outcome – and Archaea is moving to put on its first Short Volatility position in over two years (last was mid-October 2014).
First below, virtually all of Archaea’s Volatility models (one example in red below) are blowing out to absolute extreme levels seen precisely at the biggest bottoms in the last several years. A turn down in any of these models will confirm a bottom with high confidence, usually with a lag of only one trading day. Expect a follow-up note when this happens.
Next, recall virtually all of Archaea’s Core Volatility Risk Models reached record (or near-record) overbought in July/August. Below we see some of the same models are now hovering near 15-year lows, only exceeded by August 24-25 2015 (before that we’d have to go back to September 2001 for a similar compression).
In conclusion, the risk setup is one of the most favorable in years and Archaea’s base case is that a new S&P all-time-high could almost certainly be seen in the next 2-3 months.
It’s also possible (though not base case) we could see S&P all the way to 2300 by 1Q17 before the next potential rally exhausts itself. As long as the models have room, we’ll give the Bulls the strong benefit of the doubt. A tremendous amount of energy is being stored for a sharp rally and we want to be involved.
Friday, November 11 2016
Note: upcoming Special Weekend Review will focus exclusively on Rates + EM within a broad late-cycle Equity/Bond framework. Rates and Rate Vol are moving in ways we haven’t seen in a long, long time. The charts show huge late-cycle forces potentially set in motion. The ripples appear likely to impact global fundamentals and economics well into next year, in a textbook late-cycle Equity vs Bond narrative. The report will be a major update to Archaea’s long-term (1-2 year) macro views, for the first time in over a year. We’ll discuss everything this weekend.
Before we get to the regularly-scheduled charts, an early look at the Weekend Review:
Archaea Core Momentum Model. We don’t show this very often because as seen below, it almost never triggers. Well it just did. On Wednesday’s Notes, we wrote “because of today’s price action we must throw out any scenario for a new low in the market. Also, we are throwing out any scenario which calls for a sharp pullback retracement. The Equity advance is taking on very strong momentum which more likely gives only a minor pullback scenario over the next 1-3 days.” This is what we’ve been quietly evaluating all week behind the scenes:
[ZOOM] Look at the absolute perfection of this signal last Friday. Again this is fully consistent with a switch to Long Equity bias, which we initially discussed in last Saturday’s Weekend Review. What’s next? With the model this oversold, once again Archaea believes this could have the potential to launch a late-cycle Equity rally. The mere possibility of a late-cycle Equity rally forming here should be monitored very closely. For these tend to be the most vicious, relentless, non-stop moves in almost every prior Bull market in history. Perhaps the initial spark came last week with the model signal.
Some additional thoughts we’ve been quietly organizing into a framework this week, for the upcoming Weekend Review:
· Retail investors have been structural, relentless sellers of Stocks / buyers of Bonds for this entire Bull Market cycle.
· Institutional and Retail Portfolios are loaded with EM Bonds and Equities, carry trades, and other levered yield grabs.
· This cycle’s largest buyers of U.S. Equities (besides Central Banks) have been Corporate Buyback programs, which may be essentially finished.
· With the Fed now hiking (rather chasing the market as always) and Buyback programs in danger, the main avenue for the U.S. Stock market to extend higher is if investors are “convinced” out of Bonds + foreign assets.
· What’s the trigger for a convincing “Buy American growth, Buy U.S. Dollars vs everyone, Buy Inflation, Sell Bonds, Buy U.S. Stocks over EM” narrative?
· Emphasizing that a convincing narrative is needed, so that Retail investors gradually revert back into Equities, initially from the pain and selling of Bonds, but then gleefully pyramiding into Equities in response to (and reflexively feeding) a late-cycle rally.
· Thus potentially fulfilling a textbook final stage of this Bull Market cycle.
· And like all prior late-cycle rallies, one that could be extremely lucrative, but also very narrow in opportunity – so identifying the opportunity set in advance is a matter of survival.