“The tools to enhance and extend our lives are already in our hands.”
- Ray Kurzweil
The risk management tools used to preserve our hard earned capital (when many are losing theirs) are already in our hands too. As Kurzweil goes on to remind us in a book I just started reading called Life Force:
“We just need the courage to question outdated assumptions that limit our ability to use them.”
I didn’t always have this #process. I used to be Captain Stock Picker (1). What changed me? Time and space did. But right after I left the mothership to start my own hedge fund (in 2005) I read a book by Ray Kurzweil titled The Singularity Is Near.
Back to the Global Macro Grind…
People always ask me questions like “what book do I read to better understand your process?” or “how do I learn about fractals and markets.” I get why. But there is no “book.” At least for me, my process is a constant evolution.
Unlike most of us, many Hedge Funds don’t evolve. Unlike many of our Long Only clients, most hedge funds that don’t evolve also go away. The name of The Game is A) don’t have major drawdowns and B) generate alpha.
If you do not do A & B, someone else will.
For the touchier “feel” types, yesterday and the day before that probably “felt like” forced selling in both European and US Equities. Well, those feelings can be quantified. It was the largest de-grossing (selling) in “fundamental long/short” Hedge Fund history.
History buffs will acknowledge that encompasses a long time-series. Looking at my own #VASP Signals + positioning data of one of the biggest Hedge Fund Prime Brokers on planet alpha, here’s how to quantify that:
A) It was Day 5 (in a row) of net SELLING of Gross Long Exposure (relative to covering shorts)
B) Week-over-week Gross Leverage was the largest ever (and ever is a long time)
C) > 70% of the single stock selling of Longs was in Consumer Discretionary and Tech
D) All of this happened with front-month fear (VIX) going right to the top-end of my Vol of Vol Range (i.e. VIX 38)
E) Total US Equity Volume was +26% (Monday) and +45% (yesterday) vs. its 1-month average!
F) SPY, XLK (Tech), and XLY (Consumer Discretionary) all closed within 0.5% of the LOW end of my Risk Range
Did I nail it? Who cares what I did. No one that’s losing in this business wants to hear from the winning team (especially if I Captain it!). What matters here is who got nailed. There are some hedge funds drawdown numbers that will blow your mind.
#HedgeyeNation will be more obsessed with “why” I sold-SOME Gold before it corrected -2% this morning. But why isn’t our profession (the Asset Allocators in particular) more obsessed with finding a better process and a better way?
Why is it that literally every time we see a -20% crash/drawdown in a consensus index like the NASDAQ that many consensus hedge funds do worse than Long Onlys? The simple answer is crowding and consensus positioning at particular points in Cycle Time.
At the most basic level what does that mean?
A) Either when I wrote “Short QQQ’s Now” (FEB 10) or at last week’s rally to lower-highs, they should have sold
B) Yesterday they should have been buying/covering
That’s it. That’s all they had to do. Be better. Don’t be the crowd. Get it right.
On that note, you got my #Oversolds & #Overboughts note from my Top 3 Things yesterday. Here’s the “next play” as we say in hockey, after that:
#Oversold (Equities) and #Overbought (USD and Gold), they were…
- VIX – pretty much a textbook flush of the weakest gross long exposures at VIX 38 (which is still the top-end of my Vol of Vol Risk Range) on massive volume (largest week/week de-grossing of “fundamental” hedge fund longs in hedge fund history fyi) with Total US Equity Volume +45% vs. the 1mth avg! Covering shorts well isn’t something everyone does well
- USD – equities we’re signaling #oversold, and USD (and Gold which is correcting -1.8%) we’re signaling #overbought – EUR/USD bouncing a big +0.8% this morning – don’t forget that the things that go up/down the most AFTER markets crash often reverse the most on a short-term basis (Gold’s immediate-term correlation to USD = +0.9)
- RATES – finally rates are trading directionally with Equity Risk – that makes things easier to trade/fade actively (stocks rally alongside bond yields, so the DAX has a BIG bear market bounce of +4.8% here this morning alongside a +8bps bounce in the 10yr Bund Yield, same for UST yields vs. SPY); no change to the shape of the US Yield Curve which remains at Cycle Lows
So, of all the days so far in 2022, today is when I have A) my lowest Cash (US Dollar) position, B) my highest gross invested Global Equity position (including my Top 5 Emerging Market Longs – IDX, THD, EZA, EPHE, EWM), and C) largest net LONG position.
Yes, you know I am going to take that down on green. Especially on the Long/Short side of my book, it won’t take me long to take that net Long back towards Neutral then net SHORT. Isn’t that what you’d expect this hedge fund guy @Hedgeye to do?
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.67-1.94% (neutral)
UST 2yr Yield 1.39-1.68% (bullish)
High Yield (HYG) 81.47-83.21 (bearish)
SPX 4151-4321 (bearish)
NASDAQ 12,618-13,609 (bearish)
RUT 1 (bearish)
Tech (XLK) 142-154 (bearish)
Shanghai Comp 3 (bearish)
Nikkei 24,609-26,187 (bearish)
DAX 12,471-13,816 (bearish)
VIX 28.24-37.98 (bullish)
USD 96.90-99.78 (bullish)
EUR/USD 1.078-1.115 (bearish)
USD/YEN 114.69-115.99 (bullish)
Oil (WTI) 104.73-128.94 (bullish)
Gold 1 (bullish)
Copper 4.45-4.95 (bullish)
Bitcoin 35,280-44,516 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
