Week 7: The plural of anecdote is often data
Short XPO
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This is Trade 7: The plural of anecdote is often data
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Update: Open Trades
EWC long at 37.85 is doing OK despite further global weakness in equities.
I’m cutting the bitcoin long. You got every piece of positive news you could have hoped for from that trade and yet it has not performed. Sanctions, gold exploded higher, stocks stabilized for a while, and BTC is… Unch. It has had plenty of time to rally (and it did, in fact, rally to $44k) but it looks abysmal now and with the Fed this week, I hate it now. Cutting at flat. I am not sticking with the plan here because the upcoming event risk is significant (The Fed) and the thesis has played out and is now stale. So I don’t mind cutting it and moving on.
Once I am out of a position, I don’t have a lot of psychological attachment to it. If BTC goes to $50k now, I’ll feel a brief pang of FOMO but it will be short-lived. As a short-term trader, there are 100s if not 1000s of opportunities every year.
Today, we cover one of my favorite areas of behavioral finance: Anecdotal evidence.
Anecdotal evidence
Anecdotal evidence is any information you gather by personal observation. It normally involves behavioral observations and sentiment red flags. Some signposts marking human behavioral extremes can be predictive.
There is a wide range of anecdotal evidence you can incorporate into your analysis of the financial markets and use to confirm existing views or establish new conclusions. Analyzing anecdotal evidence is fun, but can also be unscientific and often unreliable.
There is a saying you hear now and then: “the plural of anecdote is not data.”
Weirdly, that saying, while commonly tossed around, is a misquote and is the exact opposite of the original quote by UCal professor Raymond Wolfinger. The fact is, singular anecdotes, when approached judiciously and aggregated with other confirming evidence, can lead us to meaningful conclusions and predictions. Often anecdotes are the n=1 that lead us to find a larger sample of evidence to support a thesis that we never would have thought of had it not been for the original anecdote.
Perhaps the most accurate saying would be: The plural of anecdote is often data. Anecdotes do not exist in a vacuum. Data does not emerge out of nowhere.
The risk with anecdotal evidence is that it is fraught with the potential for sample size issues, confirmation bias, and cherry-picking. If you are bearish, you are going to notice bearish anecdotes more readily than bullish ones, for example. The advantage of anecdotal evidence is that it can be observed in real-time and can be easy to understand. It is logical and intuitive.
The Magazine Cover Indicator
The most famous anecdotal indicator is The Magazine Cover Indicator. The indicator says that when a financial story or market theme is displayed on the cover of a mainstream magazine, that theme or the related trend is near exhaustion. In other words, magazine covers are reverse indicators.
Two famous examples of this phenomenon are when BusinessWeek’s cover hollered: “The Death of Equities”, right as the stock market made a major bottom in August 1979 and when The Economist proclaimed the world to be: “Drowning in Oil” just as oil bottomed in 1999.
S&P 500, 1958 to 2000
Crude oil, 1992 to 2008
Two other well-known examples of the Magazine Cover Indicator are the appearance of Jeff Bezos as Time’s Man of the Year in 2000 just before the tech bubble burst and Russian President Vladimir Putin as Man of the Year in 2007 right before the collapse of oil brought down the Russian economy.
The premise behind the indicator is that when a journalist or editor finally devotes a cover to a market trend, company, country, or person, the story or theme has been in the market for some time and is likely past its peak. Positioning and sentiment should already fully reflect the story on the cover of the publication. In other words, by the time a magazine features a trend, it is not news. The story is priced in.
To avoid the cherry-picking problem, I did an empirical study of all covers of The Economist to see whether they are contrarian in aggregate. The evidence shows that they are. You can read the complete study here.
The Skyscraper Indicator
The Skyscraper Indicator suggests that when a country builds the world’s tallest skyscraper, it is a sign of overconfidence and a potentially imminent financial crisis. Countries build world-record-setting skyscrapers only during bull markets when credit is plentiful, and thus historically there have been many instances where the country building the world’s tallest skyscraper subsequently fell upon hard times.
Some salient examples are 1929: The Empire State Building (followed by Great Depression), 1972: the World Trade Center and Sears Tower (1970s stagflation), 1997: the Petronas Tower (Asian Financial Crisis) and 2005: the Burj Dubai (Real Estate collapse and financial crisis). The indicator doesn’t produce many signals, of course, but it has an impressive track record. Here is an interesting academic paper on the topic: http://mises.org/journals/qjae/pdf/qjae8_1_4.pdf .
Instead of focusing on a single anecdotal indicator, you can also observe extremes in sentiment when many anecdotes come together at once. A good example of this was in 2007 when fears of a dollar collapse raged because of the twin US deficits (trade deficit and budget deficit) and massive dollar selling by central banks like China and Saudi Arabia. The following three anecdotes appeared around the same time:
1. November 6, 2007: Supermodel Gisele Bunchen asks for her contracts to be modified and paid in euros instead of dollars.
2. November 17, 2007: Jay-Z is featured making it rain euro notes in his new rap video instead of the traditional Benjamins (US dollars).
3. November 2007: This meme goes viral:
The EUR hit an all-time high shortly after these three anecdotes circulated. The weak dollar was part of the mainstream narrative and these anecdotes were evidence that the theme was popular, well known, priced in, and at risk of turning stale. The dollar peaked four months later and the EUR never traded higher again.
Overall, anecdotal evidence is interesting and fun and can be a useful input into your big-picture macro analysis. Just be aware that anecdotal evidence is unscientific and fraught with pitfalls. The power of contrarian anecdotes tends to be evident in hindsight but my experience is that people are constantly pointing out anecdotal evidence to support their contrary view during strong trends and some of it works, and some of it doesn’t.
Don’t get too excited about anecdotes. Treat them as one extremely fascinating, but not very predictive input into your process. Those with experience will recognize when history repeats or rhymes and anecdotes from the present market will match past anecdotes and help the experienced trader to see patterns that may have some forecasting value. If you find yourself thinking “I’ve seen this movie before” … You probably have.
Think rationally about whether the anecdote you have observed could be representative of the underlying data/reality.
The IPO indicator
A massive Initial Public Offering (IPO) can be another indicator to watch for as the sign of a top in a specific industry or for the stock market as a whole. By definition, the only time the market will absorb a very large IPO is when sentiment is bullish and the market is trading extremely well. Companies will rarely go public in a weak market because they want to sell shares in their company for the highest price possible.
IPOs tend to be plentiful in the late stages of a bull market as owners of companies see their market value rise and decide to cash out. IPOs are often seen as smart money selling out to dumb money. After all, if you strongly believed that your stock was cheap and your company was set to grow dramatically, why would you sell?
A great example of the IPO indicator is when Glencore sold its initial public offering in 2011. Glencore is one of the largest commodity producers in the world and in 2011 the world was in the midst of the second wave of an extreme bull run in commodities known as the Commodity Supercycle. Chinese and speculative demand had pushed commodity prices to new peaks and investor appetite for anything commodity-related was insatiable.
The insiders at Glencore were smart and realized that if they ever wanted to sell their company (which was massive at the time, valued at about $60B) this was a great time to do so. It is not hindsight to talk about how they sold the top—many observers and analysts (including me) pointed out at the time that the IPO could be a textbook sign of a top for commodities.
Take a look at the next chart which shows the Glencore IPO marked on a chart of the CRB. The CRB is the benchmark commodities index. Note how the Glencore IPO marked the exact top tick for commodity markets.
Daily CRB Index, 2009 to 2017
Monster IPOs do not happen often but the signals are so powerful that it is worth keeping this indicator in the back of your mind in case you see something similar in the future. The Coinbase IPO in April 2021 is another example. The day of the COIN IPO marked the first of two major peaks for crypto. The second peak was marked by another famous anecdotal setup: The Stadium Curse.
Bitcoin, 2020 to now
The Stadium Curse
A feature of epic bull markets and booming industries that are overearning and pumping out extraordinary excess cashflow is: at, or near peak levels of optimism, you start to see the names of companies from that industry on stadiums. The 2000 dotcom mania provides many examples including Enron Field, CMGI Field, the MCI Center, the Corel Center, and PSINet Stadium. Those are all companies that boomed in the internet bubble and went bankrupt (or almost bankrupt) afterward. Needless to say, those stadiums all have different names now. Then, you had Citi Field and Barclays Center, both named in 2007 at the peak of the bank stock and housing bubbles.
Oops
Not every company that puts its name on a stadium goes bust, of course, but it’s a signpost marking possible hubris and excessive cash on hand. They even have a name for it: The Stadium Curse. Much like the Skyscraper Index, stadium naming is a potential overconfidence indicator.
There was never a more obvious one than when Crypto.com became the new name of the LA Lakers’ arena at the ding dong highs mid-November 2021. This is not hindsight: I wrote about it as part of my November 2021 cyclical bearish crypto thesis here. That event coincided with a massive bubble in crypto sentiment and a straight-up mania of utopian Web3 visions.
Oops, I did it again
I hope this quick intro has given you a solid introductory understanding of anecdotal evidence and opened your mind to a particular type of behavioral indicator.
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Now, let’s get to today’s trade idea…
Trade 7: Short XPO
On Friday, March 11, French logistics company Geodis signed a contract to put its name on the largest soccer stadium in North America. This is pretty random and certainly a meaningful sign that logistics companies have never been more confident and flush with cash!
Oops, I did again (again)
While I would not use this as a reason to go short logistics companies all on its own, there have been quite a few other reasons to think we may have hit an extreme in the commodity shortage, supply chain bottlenecks / logistics story.
We are about to rotate back to a services-led economy. For the past two years, we have been locked in our homes, buying junk we don’t need from Amazon. Now, as we line up to buy concert tickets to go see Kendrick Lamar or Phoebe Bridgers or whoever, plan client dinners in Miami, and just generally crawl out of our caves and into the light… Shipping and logistics are not going to be as important. You could probably put logistics in the “obvious COVID beneficiary” category and the stocks of most obvious COVID beneficiaries have now collapsed as that narrative has expired. ARRK, Robinhood, PTON, etc. etc. etc.
Chinese metals tycoon faces steep losses on nickel price surge (FT). Blowups and margin calls tend to be late-stage dynamics in a bull market. By the time people are blowing up and being forced to cover shorts, it’s usually near the end of the move. The inverse of this is the famous Sumitomo Copper Affair, where forced selling to unwind a rogue trade put in a major bottom in copper in 1996.
CPI goods inflation relative to services has started to come off. This is another sign that we’re past peak goods and moving back to services.
Oil made a classic Sunday night gap high at $130 has not been there since. Sunday gaps tend to often make multi-month extremes as liquidity is horrendous on the open and markets tend to find max overshoot on the Asia open.
Gold and other commodities making blow-off tops all over the place.
The global macro story is slowly but surely going to turn away from goods and back to services. This will take pressure off supply chains and reduce the premium paid for logistics companies.
I’ll be perfectly honest, I’m not qualified to do a deep dive on XPO fundamentals. That isn’t really the point of this trade. I chose XPO mostly because I like the entry point vs. other logistics companies like GXO (an XPO spinoff). XPO recently announced another spinoff and that triggered a big jump in the stock. To me, it’s a great spike to sell as the good news is out of the way and you are selling into a 15% jump. This is in contrast to the other logistics companies, where you are selling the exact lows.
The chart is an absolute mess but there is a horizontal pivot at $73.75 and some nice downtrend channels in the same area. The spinoff news triggered an extremely aggressive blastoff through all the resistance and that blastoff failed to launch like Matthew Mconaughey’’s character in the 2006 film with Sarah Jessica Parker.
XPO cannot take out $73.75 despite a valiant effort
These anecdotal sort of trades tend to take a few months to play out so let’s compare two ways to structure this thing:
Short the stock at $70 with a stop at $81.25, target $53.50. I put the stop loss above the last four daily highs (76, 78, 81, 81) and about four X an average day’s range away. That gives it some breathing room since the goal is to get all the way down to $53.50. Risking 11.25 to make 16.50. Note these take a while to write. The stock is around $68.70 now. I will always mark to market the trade at the price when I hit “publish”.
Buy the May $60 puts for $2.60.
If we risk $2,080, we get this spreadsheet (normally risking $2,000 on these trades in 50in50 but 8 option contracts costs $2,080, close enough):
And the chart of the P&L looks like this:
If you are not familiar with how to compare cash and options positions, please see the last 50in50 right here.
The leverage looks pretty good on the puts here so I will go for the option. The odds of getting stopped out at $81.25 before it subsequently collapses to $50 are not zero, either. The stock sometimes moves 10% in a day.
Over the last 60 days, historical volatility has been around 60% while the implied vol on the puts is 50% so it passes the sniff test there, too. I wouldn’t say the option is obvious here, but a quick move lower gives us extra leverage and protection from a whipsaw so the option looks marginally more attractive. Also, this isn’t the kind of trade where it sits there and does nothing (like EWC might be, see 50in50: Trade 6). XPO is flying all over the place.
Fully completed trader template here.
Conclusion
50in50 goes short XPO, buying 8 contracts of the May 2022 $60 put at $2.60
The target is $53.50 and there is no stop loss because we own the option. The summary of the reasoning is:
The largest soccer stadium in North America sells naming rights to a logistics company. The stadium curse is a good indicator! It implies we may have hit the peak of the bull market in logistics.
We have just had a 2-year orgy of goods buying. People are out of breath and can’t buy any more goods for a while. That suggests pressure on logistics should abate.
Commodity markets are breaking and margin calls are coming in. This usually happens near the end of a trend, not the beginning.
Oil made a textbook top on last Sunday’s open.
Commodity blowoff tops.
That’s it for today! I am having fun writing these and I hope you are having fun reading them. As always, I will monitor the performance and offer detailed updates as we progress. See you next time!
Thanks for reading.
Trade at your own risk. Be smart. Have fun. Call your mom.
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DISCLAIMER: Nothing in “50 Trades in 50 Weeks” is investment advice. Do your own research and consult your personal financial advisor. I’m putting out free thoughts for people that want to learn. This is an educational Substack. Trade your own view!
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Another great sign of a top is the All Stock M&A