“Progress is impossible without change; and those who cannot change their minds cannot change anything.”
- George Bernard Shaw
I don’t know about you, but I have no problem shorting all of my longs and/or going long all of my shorts. Maybe it’s because I’m not a preacher for a political party, an asset class, or a coin. Maybe it’s just because my math-based process goes both ways…
Adam Grant uses the aforementioned quote to introduce the book that I cited yesterday: Think Again – The Power of Knowing What You Don’t Know. It’s a book about:
“Letting go of knowledge and opinions that are no longer serving you well (see Old Wall click-bait Media for details), and to anchor your sense of self in flexibility rather than consistency.” (pg 12)
Back to the Global Macro Grind…
So what’s their narrative this morning, “contagion”, crash, or #Quad2 in Q4?
We know what it won’t be. And that’s The (fractal) Signals front-running The (economic) Quad. Thank goodness for that. If we didn’t get to wake up to their bloody narratives every morning, we wouldn’t keep winning market and mind share!
I think one of my competitors (who has been trying to find reasons for a 10-12% correction) went to a “20%” crash call yesterday. To be fair, if you take the market price from where he started with the 10-12% call, he probably needs 20% to break-even.
But what really just happened on another episodic-and-non-TRENDING US Equity Vol Spike other than our short China (FXI) and Honk Kong (EWH) positions working out? (Hang Seng did crash > 20%!)
A) US Equity Beta (SPY) has corrected -3.9% from its ALL-TIME HIGH
B) NASDAQ has corrected -4.3% from its ALL-TIME HIGH
C) CRB Commodities Index has corrected a whopping -3.1% from its CYCLE HIGH
Notwithstanding the fact that both the SP500 and NASDAQ made those ALL-TIME HIGHS this month (and that it would have been nice to get a heads up from these people making “calls” that that was going to happen prior)….
What are we really talking about here in terms of Asset Allocation decisions?
A) LARGE CAP QUALITY GROWTH works in both Quads 2 & 3, so we’re staying long of those FACTOR EXPOSURES
B) Long COMMODITIES works in both Quads 2 & 3, so we’re staying long of that cycle which is heading to Peak Cycle
C) Pivoting out of Gold and Utilities (XLU) as the probability continues to rise of a Quad Shift into #Quad2 in Q4
There was no narrative that took our GDP Nowcast for Q4 of 2021 higher yesterday – there were just reported numbers:
A) Our US GDP Nowcast for Q4 of 2021 ticked up to +5.82% year-over-year from +5.80% the day prior… and
B) That number should be higher if/when the economy opens up with both Global and US covid cases decelerating
That second part (B) isn’t in the nowcast. That’s me front-running some of the big components of the nowcast (like INVENTORY) that would have ROC (rate of change) tailwinds that reflect the inverse ROC of the covid variant headwinds in Q3.
So, that’s a narrative that is derived from A) the numbers that have already been reported and B) my market signals that do a good job of front-running future numbers that will eventually drop into the nowcasts.
Consensus, however, is expecting a continued slow-down in Q4 from the #Quad3 in Q3 Real Growth Slowdown that our model already nailed. That’s why this morning’s update on market sentiment/positioning is so tantalizing:
A) SP500’s implied volatility PREMIUM just registered an epic 3-handle on a TTM z-score (very rare)… with
B) A reading of +104% vs. 30-day realized and immediate-term downside in my VIX Risk Range towards 15.30
Coming into this unbearable -3.9% SPY correction, don’t forget that Wall Street consensus was already net SHORT SP500 (Index + e-mini) contracts on the order of a -22,035 net SHORT position. They were also net LONG of US Dollars.
And with this morning’s immediate-term TRADE inverse correlation of -0.88 between SPY and USD, it wouldn’t take much (including a dovish Fed that is also too bearish on GROWTH and INFLATION for Q4) for SPY to ramp another +5-9% from here.
A +9% rip would give me a volatility-adjusted “price target” of 4749. Maybe I’ll make a 20% #Quad4 in Q2 of 2022 crash call from there. Been there and done that before. Timing matters.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.28-1.41% (bullish)
UST 2yr Yield 0.21-0.26% (bullish)
SPX 4 (bullish)
RUT 2165-2271 (neutral)
NASDAQ 14,636-15,424 (bullish)
REITS (XLRE) 46.01-48.17 (bullish)
Tech (XLK) 152.08-160.01 (bullish)
Shanghai Comp 3 (bearish)
DAX 15,102-15,918 (bullish)
VIX 15.30-27.52 (bearish)
USD 92.13-93.38 (bearish)
EUR/USD 1.171-1.187 (bullish)
Oil (WTI) 68.18-73.44 (bullish)
Nat Gas 4.64-5.59 (bullish)
Gold 1 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
