Dangerous thin stock market breadth, I expect a pullback!

Sorry for the hiccup at the beginning of the week, I hedged with 40% (short 20% on QQQ, short 20% IWM) at the open of Monday and covered the 20% hedge on QQQ 2 hours before Market close on Monday and lifted the rest of the shorts (20% IWM at the open) on Tuesday morning.

The Quads flipped on Monday morning, usually I wait for a week, but the thrust was too strong, so I took the risk to trusted that intraweek Quad push to 1-2.

My call last week was a “constructive Quad 3, still constructive" with a * that points to an environment where one should be alert but open for both outcomes (up or down).

Stuff like that happens, the hedge cost me about 1% performance, so nothing major.

One educational thing for me first:

Above you see a backtest from 3Fourteen @WarrenPies (Twitter), it shows that Quads work!

My Quad Buckets:

Consumer Staples: Quad 4 (Risk off)
Utilities: Quad 4 (Risk off)
Energy: Quad 2 and 3 (two if Tech is also leading, 3 if tech is not leading)
Industrials: Quad 1 (Risk on)
Consumer Discretionary: Quad 1 (Risk on)
Communication Services: Quad 1-2 (Risk on)
Tech Quad 1-2 (Risk on)
Real Estate (I only use the Builders): Quad 1-2
Basic Materials —> I have them in the constructive Quad 3 Bucket, e.g. if they are bullish and Oil and Dollar not, that is fine for the market!

Next week? Here is the picture:

The call is a Quad 2 with a *, e.g. I would not add risk here but look for spots to reduce risk and I am leaning to hedge!

Why:

Breadth is very weak!

Positioning still neutral to (too?) stretched:

Reactions to earnings is overall bad (not good at all!).

I went through all (bigger) earnings since Jan 05, 11 positive reactions, 31 (!) negative reactions.

Earnings season is a bullish time, but not if the market rallied massively before earnings season, in this case expectations are mostly too high.

Bitcoin’s potential news failure:

Bitcoin sensitive stocks show relative weakness to bitcoin:

I am still watching this video, but my notes tell me, that from around 17th of January a window of weakness in terms of flows start (and this already shows in breadth!):

Also I think the Fed will demonstrate a more hawkish rhetoric from here on because the market is up hard and Treasury will use the strong market to issue (reflexivity!).

My model is doing fine (but is selling more and more positions):

50% sell on VTSI:

SURG sold (everything):

ESEA Sell (all of it):

Look, we had a good run since the Quad 2 call on 11/3/2023.

Here is my game plan:

• I will not add any risk here (I am long about 80% going into Monday)

• I am leaning to hedge (I will notify) with a 40% short on IWM (so half of my longs will be covered by the short).

All right, have a great week.

All the best and best regards.

Andreas

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