“Oh Mr. Feynman, don’t tell me you got that walking into a door?”
- Professor of Philosophy
“Not at all, I said… I got it in a fight in a men’s room of a bar in Buffalo.” -Dick Feynman
Loved that excerpt from Surely You’re Joking, Mr. Feynman. It reminded me that even the geekier guys end up getting punched in the face sometimes.
Personally, I got pounded by the market yesterday. Just bloodied. It reminded me of a night in Hawkesbury, Ontario (Junior Hockey Game in the early 90’s) - worst beat down I’ve ever taken – didn’t land one punch.
Back to the Global Macro Grind…
While I may have landed one and broke a Gold Bugs' nose yesterday, pretty much everything else went wrong.
Since I had to spend a LOT more time re-modeling and doing math this morning than I have time to write about it, here’s the summary of my work in my Top 3 Things note (goes out to our Institutional Research Subscribers at 6AM, daily):
My 4 Horsemen got shot yesterday – worst P&L day of the year in P.A., by far… maybe I bounce…
- 2YR – what triggered all of this uniquely American drawdown action in both equities and bond yields (the ECB, RBA, etc. did nothing – neither did European, Australian, South Korean, etc. Equities) was the Fed shocking the short-end of the curve to 0.23% on 2s; that’s got no follow through this morning and looks like a 1x thing
- USD – follow the flow of The Machine – 2yr shocked, USD follows that monetary policy reset (it was relative, don’t forget – the Swiss went MORE dovish yesterday, Franc got pounded vs USD), and Commodities (highly correlated) got hammered – again, no follow-through to that 1x reset this morning in FX
- GOLD – I’m out. Not a Cycle call. It was a Signal decision. Covered my entire short position yesterday (which offset some of my losses in Silver!) as my immediate-term TRADE duration correlation went to -0.98 intraday on Gold vs USD. That almost never happens (that means, short-term, Gold should rip higher if USD resumes its Bearish @Hedgeye TREND)
Making a Cycle Call on #Quad4 would have made my bloody mess bloodier this morning. In a proper #Quad4 US stock market beatdown, both Tech and the NASDAQ get annihilated and the VIX rips higher, don’t forget.
Also remember what happened leading into yesterday (i.e. 2 straight knockout punches for Copper/Commodities):
- “China Sells Commodities”…
- Fed Shocks Short End Of The Curve
The concussed man might have a harder time seeing everything else that’s going on around him in Global Macro (like the aforementioned moves in Global Equities, European Rates, NASDAQ signaling all-time highs, etc.)…
But I’m not dead yet.
The other major market factor to consider is one that very few people either understand or have written about this year… and that’s the market structure changes being perpetuated by hedge funds:
A) Too much leverage…
B) Not enough liquidity (especially in single stocks)
When a growing supply of hedge funds are trying to run “neutral” to Factor Exposures (with leverage)… and specific Factor Exposures blow out in 1-3 day windows of Clock Time, monthly – they can’t get out.
Show me how 10-20 hedge funds get out of 10-20 Small to Mid Cap Energy Stocks in 1-3 days of Game (or Clock) Time, and you’ll see my point very clearly. If you missed yesterday’s “lunch-time lull”, as I call it, you missed a heck of a move!
Between the hours of 11AM-1PM ET, humans at hedge funds go get and eat their lunch. Those are the least liquid trading hours of the day. Even SPY tagged the low-end of my @Hedgeye Risk Range™ Signal at 12:30PM yesterday at 4199.
While the low-end of my Risk Range math yesterday was 4200, this morning’s math spits out 4206. That’s a higher-low. Why? My Vol of Vol Signal didn’t change for the worse yesterday. It got more bullish for US Equities!
Again, that’s no #Quad4 Signal, in as much as the stock markets in Australia and France opening higher weren’t.
But why? I already told you why. US Long/Short Hedge Funds aren’t levered long those Equity markets! Another observation point that is plain to see to anyone's eyes who aren’t swollen shut this morning is that… wait on it…
These monthly draw-down or episodic-and-non-TRENDING US Equity Factor Exposure events have happened EVERY month in 2021 since the hedge fund HIGH SHORT INTEREST drawdown in January… right into options expiration.
Today is Quadruple Witching day for futures and options.
And take it from a man who’s taken a lot of punches in this game too… there’s epic delta hedging and resetting of what is supposed to be “neutral exposure” all in this same super-short term window of Game Time.
If you think I’m still concussed on these observations, tell me what some hedge funds were doing only 1-month ago today with their Small Cap, Tech, and NADAQ long exposures (hint: they were de-grossing into yesterday’s all-time QQQ highs).
I may be bloodied, but I am not doing that this morning. Chasing high and puking low? C’mon man. I don’t have a boss who can make me do that. Don’t forget that’s a competitive advantage I have in the next market fight. I can throw lefty.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.45-1.65% (bullish)
UST 2yr Yield 0.15-0.23% (bullish)
SPX 4 (bullish)
RUT 2 (bullish)
NASDAQ 13,835-14,256 (bullish)
Tech (XLK) 139.24-145.18 (bullish)
Energy (XLE) 53.63-57.05 (bullish)
Financials (XLF) 35.76-38.70 (bullish)
Utilities (XLU) 64.71-66.69 (neutral)
Shanghai Comp 3 (bearish)
Nikkei 28,701-29,438 (bullish)
DAX 15,506-15,789 (bullish)
VIX 14.33-18.77 (bearish)
USD 89.41-92.11 (bearish)
EUR/USD 1.190-1.227 (bullish)
USD/YEN 109.14-110.81 (bullish)
GBP/USD 1.390-1.423 (bullish)
CAD/USD 0.80-0.83 (bullish)
USD/CHF 0.88-0.92 (neutral)
Oil (WTI) 68.87-72.77 (bullish)
Nat Gas 3.03-3.39 (bullish)
Gold 1 (bearish)
Copper 4.17-4.70 (bullish)
Silver 25.56-28.90 (bullish)
Bitcoin 32,008-41,315 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
