Macro Time

It was a little chillier when I got up this morning here on the East Coast. That physical feeling likely lines up with the mental ones that were triggered yesterday for anyone who manages risk using quantitative models. This market remains one that should be rented, not owned. Cash remains king.

Following the lead of the US Financials, the S&P 500 broke my short term “Trade” momentum level yesterday. Respecting the math is critical at this juncture, as is respecting the fact that it is now what we call “Macro Time”. US Earnings season is coming to an end, and I encourage you to pull up the chart (that we put together yesterday on the ‘Portal’) that slices up the 2008 trading year to date into time intervals. We are entering the 3rd period of post EPS seasonal trading. The S&P rolled over hard in the prior two. Three strikes and the levered long bulls will be down for the count.

“Macro Time” in late August through September could indeed get chillier. Depending on what factors you have in focus, there should be more risk on your screens than you’ve had to consider coming out of both February and May Earnings. Let’s go through 6 of them…

1. The US Election is nearer
2. The Russians are bolder
3. The Investment Bankers are shakier
4. The Fed and Treasury are scarier
5. TED (risk) spreads are wider
6. Global Economic Growth is slower

Of course, if you “don’t do macro”, as many managers ended up proclaiming during the 25 year bull market, you don’t have to worry about these silly factors. You can go about your daily routine, asking people for their “best ideas” or sitting down for “one on one’s” with management teams who clearly didn’t do macro either.

What happens when the answers you get in these vaunted “one on one’s” have negative predictive value for the aforementioned factors? If you’re not into the geopolitical risk factor side of managing other people’s money, what do you do when the CFO sitting across the table from you didn’t manage for foreign currency risk?

Consensus has morphed into complacency again. At Research Edge, we take one of three positions on markets and stocks – Bullish, Bearish, and Not Enough of one or the other. This week is the first week since May that I can review my notebook and ascertain that Wall Street is ‘Not Bearish Enough’. This of course can be quantified by a variety of tools I use to manage risk. Without giving away my model, you can pull up obvious factors like Volatility (VIX) that’s dropped by almost -30% since Q2 Earnings Season started, or this morning’s ‘II Bullish vs. Bearish Survey’ which saw “Bulls” gain 9 full percentage points in the last week and “Bears” falling by another 8 points.

It is global this time, indeed. In a global marketplace of quantifiable factors that are increasingly correlated, it is “Macro Time” again. If the only factor that matters to your bottom’s up work is that “Global Economic Growth Is Slowing” (#6 on our list), I highly encourage you to have your analysts and brokers walk you through potential tail risks associated with a protracted downturn therein.

Good luck out there today,
KM