“When you’re a Cleaner, you know exactly who you are.”
-Tim Grover
Yep. And, when my risk management process sees #Quad4 market crash conditions rising, I know exactly what I see.
That’s the thing about having a process that has never missed being on the right side of a US stock market crash going on 22 years. I don’t have to overthink it. Like a “Cleaner”, my #VASP “doesn’t think at all, it just knows.”
No. That doesn’t mean the US stock market is going to crash today.
It could though. And that’s the point about knowing about probabilities rising.
As Grover went on to remind me about playing my game in Relentless: “If you want to go somewhere new, you have to throw out the tired, old map and stop traveling the same road to the same dead end.” (pg 67)
Back to the Global Macro Grind…
On that cheery note. Welcome to another day in central-market-planning-paradise where all of you are beholden to an unelected man determining the fate of your hard earned moneys.
Yeah, this note is going to be a little different than Goldman’s this morning. They’re the ones “calling” for “more than 4 rate hikes” in order to fight the acceleration in US inflation that neither they nor the Fed predicted.
To put those now Consensus Crash Conditions in context:
- Since starting Hedgeye in 2008, the US stock market crashes 100% of the time IF the Fed tightens into a #Quad4
- Today’s Chart of The Day shows you the expectations that GS set (market expectations ramped to 3.98 hikes)
- If/when that expectation goes > 4 hikes, stock market crash Conditional Probabilities rise (towards 3 they fall)
That said, I’ll reiterate that 1, 2, or 3 hikes will probably crash markets into #Quad4 in Q2 anyway. From today’s hopeful pre-market US Equity Futures ramp, the Russell 2000 (IWM) could be in crash mode by the end of the day.
It wouldn’t take much to get there. The Russell is already down -17.9% from its #Quad2 in Q4 Full Investing Cycle Return peak price of 2442. That’s not a -45% crash like Bitcoin has had from that same day (November the 8th, 2021), but -20% will do.
What’s Crash Country?
A) When the Volatility of a thing breaks out on a TRENDING basis into the 30s and 40s (in an Equity market’s case)… and
B) The economy of that thing heads into a #Quad4 (see the US Consumer Confidence #slowing data for JAN for details)
Where’s US Equity Volatility?
A) For the Russell, front-month #RussVol = 38 with my Vol of Vol Risk Range™ Signal of 28-43
B) For the NASDAQ, front-month #NazVol = 38 with my Vol of Vol Risk Range™ Signal of 27-41
The NASDAQ’s drawdown is already -15.7% from where it put in its #Quad2 in Q4 Full Investing Cycle Return peak on November 19th at 16,057. So it won’t take much for that to crash from here either.
Oh, but… Microsoft (MSFT) bounced in the after hours on what the CFO said.
Cool, thank you to the Macro Tourists for coming out and supporting the message of an under-owned “story” that has immediate-term downside towards $283/share if/when the NASDAQ moves into crash mode.
MSFT peaked at $343 on the same day that the NASDAQ did. It’s not a stock pick here. It’s a Macro Exposure.
Oh, stop it with the picks. As anyone who follows my PA knows, MSFT was one of my largest single stock positions for all of last year. I bought every damn dip in it in every #Quad2 and sold it and Tech (XLK) when my #VASP Signal broke in early 2022.
As those of you who have never seen a non-dip become a drawdown know:
A) If you’re down -16% from where you chased the high in MSFT, you need to be up +19% to get back to break-even
B) If you’re in Crash Country (down -20%), you need to be up +25% to recoup your losses
C) If you’re down -45% (Bitcoin), you need to be up +82% to get back to break-even
At most major hedge funds with multiple PMs, you aren’t allowed to have a 4-6% “drawdown”, but that’s for another Early Look. For now, you need to #PayAttention so that you aren’t trying to “call bottoms” and/or catch falling #Quad4 knives.
And yes, I get what an “immediate-term TRADE oversold signal” is. I invented these one-liners within a TRADE, TREND, TAIL definition so that you all can join me in NOT crashing when everyone else does.
KEY Crash Country point: market crashes almost ALWAYS come from “oversold” conditions.
What perpetuates crashes isn’t just the Quad Conditions; it’s also positioning. It’s that hedge funds in particular start buying, in size, thinking “this is it… everyone is too bearish… these valuations are screaming buy here.”
And looking at the big Prime Brokerage data from January 24th (the only up day for SPY in the last 6), hedgies did just that:
A) US Single Stocks saw the 3rd largest net BUYING in the last 5 years
B) Short Covering in US Equities had the 5th largest day in the last 5 years
C) Long/Short Funds finally saw their performance problems stop for that day
Yesterday wasn’t the 24th. It was the 25th and the intraday fade fed the Pain Trade. If/when they reverse US Equity futures from green to red again and stocks make lower-lows, this Crash Country will be no place for young or old wall men.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.67-1.90% (bullish)
UST 2yr Yield 0.89-1.12% (bullish)
SPX 4 (bearish)
NASDAQ 13,253-14,841 (bearish)
RUT 1 (bearish)
Tech (XLK) 147-163 (bearish)
Housing (ITB) 66.27-75.99 (bearish)
REITS (XLRE) 45.73-49.20 (bearish)
Consumer Staples (XLP) 74.30-77.55 (bullish)
VIX 20.42-36.55 (bullish)
USD 94.67-96.38 (bullish)
Oil (WTI) 79.87-86.99 (bullish)
Nat Gas 3.41-4.39 (bearish)
Gold 1 (bullish)
MSFT 283-314 (bearish)
Bitcoin 32,312-41,688 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
