Last week I shared with you some of my Best Charts of 2020. My charts and calls that worked really well in either building the picture or presenting a specific idea.
Of course, it wouldn’t be complete without a look at some of the charts that *didn’t* work (or shall we say the ones that worked “less well!”).
As noted in my previous article, I think it's good to review what worked well - I believe in learning from success. But naturally it's also good to review what didn't work, to see if we can improve processes, thinking, and to make sure we stay humble.
Hope you find these interesting and informative...
n.b. I have updated them with the latest data (in a few cases the original idea has actually come entirely full-circle). Also on formatting: the italic text is a quote from the report in which the chart originally appeared.
1. Global Monetary Policy vs PMI: This was one of my most famous charts of the previous year: it was one of a number of reasons I left 2019 with a bullish view on global growth... And then Covid happened. The global manufacturing PMI resolutely fell off the page. Ultimately it did snap back as monetary stimulus was added and sentiment recovered.
“and here’s everyone’s favourite global monetary policy stimulus indicator. The policy pivot was a key theme of last year where central banks made a resolute pivot from tightening to easing, and we’ve seen the global manufacturing PMI begin to turn as a result” (17 Jan 2020)
The lesson: things change - you can be right and then end up wrong (but then also you can be right, then wrong, but ultimately right...)
2. EM Manufacturing PMI: Again with the PMIs, we initially saw the start of what looked like a promising turn upwards at the turn of the year.
“It’s interesting to note how the Asia weighted average manufacturing PMI has turned up quite decisively (while the EM ex Asia version has dropped) there is a tendency for Asia to lead EM ex Asia, which makes sense given much of the Asian economies are at the leading edge of the global economic cycle” (17 Jan 2020)
The lesson: extrapolating existing trends can work, until a tail risk interferes.
3. EMFX Market Breadth: Another one from simpler times: pre-Covid it looked like EMFX was gearing up for a rally. It had put in a bullish breadth divergence signal (usually a good turning point indicator), and valuations were on the cheap side. As I noted, I was also sitting bullish on emerging market equities and bearish US dollar, so it all looked coherent and consistent, but then sometimes you can end up being right on the analysis but ultimately proven wrong by an unforecastable external shock.
“EMFX market breadth has rebounded and a bullish divergence pattern is in play” (17 Jan 2020)
The lesson: same thing, but to elaborate: balance the need to have conviction in your ideas with the knowledge that they can be smashed to pieces.
4. Crude Oil Seasonality: Remember the assassination of the Iranian general at the start of last year? Oil spiked on that news and then began to drift downwards. As it was sitting around support, I argued it looked oversold and seasonality was about to shift in its favour. As a slight redeeming note, I did highlight that $51 was the key level from a risk management standpoint and a break down would be a key trigger to the bearish side… but I would never have imagined that it would have gone that far that fast, or even that it was actually possible for prices to go negative. Lots of learning last year!
“the RSI is now looking oversold, and seasonal tailwinds about to hit I would say that odds are support will hold” (31 Jan 2020)
The lesson: just another piece of confirmation that seasonality is one of those peripheral indicators; it can work, but should be the last touch on an existing sound thesis. Probably the other thing to note is the importance of risk management and mental flexibility.
5. Value vs Growth - Valuations: I entered this year thinking that value vs growth might finally be ready to turn upwards given my thesis on the macro outlook (recall I was bullish global growth late last year). Valuations were also in favour. Later in the year I doubled down on the call, but again was early. After the price action in November, it does seem like things are on track now and the various puzzle pieces are falling into place. So let’s see, maybe it’s a 2021 story.
“One thing I keep coming back to is the relative valuation picture: the cheaper part of the market is more cheaper than usual vs the expensive end of the market.” (17 Jul 2020)
The lesson: valuation is a great starting point, but it is just one piece of the puzzle - make sure you have enough puzzle pieces to get a good sense of the picture (while also knowing that we can probably never have every single piece of the puzzle - until it's too late to matter).
6. Global vs US Equities: With regards to global ex-US vs US equities, again it seems to be a case of simply being too early. All the elements looked to be in place, at least from a medium-longer term perspective, but it comes back to timing. I will say that later in the year I did more work in developing tactical indicators to finesse the timing side of things, so hopefully that helps things going forward. Even this year I've added a few more very important macro indicators to the mix that have helped further build the picture here.
“the medium-longer term view remains fairly one-sided. Projecting future relative performance based on my capital market assumptions outputs presents a pretty clear scenario … there seems to be a relatively reliable circa-10-year cycle in play (and the current cycle of relative performance is past due for a turn).” (7 Feb 2020)
The lesson: as an analyst - always be building; the toolkit will never be complete (as some tools become useless and new tools become relevant). Also I think be wary of being too early in the call, but at the same time have some way of knowing what is true north - having an underlying core view is still good.
Thanks for reading!
This is an excerpt from my 2020 End of Year Special report - click through to check out the report (and while you're at it be sure to sign up for a trial of my research service!).
Best regards,
Callum Thomas
Head of Research and Founder of Topdown Charts
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