“The choice of scale can make a large difference in the amount of noise in judgments.”
- Daniel Kahneman
What happened late last week into US Equity Opex (Options Expiration) was as good an example of dealers suppressing super-short-term volatility as it was them chasing it, many times, to head-fake (episodic-and-non-TRENDING) highs in the VIX last year.
Now, if you have Old Wall friends who still think a single-factor price momentum like a 50-day #MovingMonkey is “signal”, then they’ll see what I saw both last year (buying opportunities) and last week (selling opportunities) quite differently.
Kahneman did a great job explaining how this happens in Noise: “There is a lot of noise in our judgments. Could this be because we understand the scale differently? Can we agree on the anchor case that will serve as a reference point?” (pg 199). Mine is #Quad4 in Q2!
Back to the Global Macro Grind…
Welcome to another Macro Monday @Hedgeye where we’re getting some March Madness into quarter-end. It may seem like forever ago, but it was only AFTER last Monday’s US stock market close that the NASDAQ had crashed -21.6% from its Cycle Peak.
Then AFTER a +10.4% ramp in 4 trading days, all of the “charts” are “looking good” … but the war continues… and Oil is back at $109… and #Quad4 in Q2 is still coming … and… and… the CTA “charts”…
That’s why I just stick with my #VASP (Volatility Adjusted Signaling Process) and pending Pods (REV and EPS rates of change) and Quads. Market life is less stressful that way. So let’s start with the Global Currency market signals:
- US Dollar Index corrected -0.9% last week to +2.3% in the last month and continues to signal #Quad4 in Q2
- EUR/USD had a Counter @Hedgeye TREND bounce of +1.3% last week and remains Bearish TRADE and TREND
- Japanese Yen continued to collapse vs. USD, down another -1.5% on the week to -4.6% in the last 3 months
- GBP/USD had a Counter @Hedgeye TREND bounce of +1.1% last week and remains Bearish TRADE and TREND
- Canada’s Dollar was +1.1% last week to +2.3% in the last 3 months and moved back to Bullish TRADE and TREND
- Sri Lanka’s Rupee continued to crash, down another -5.9% vs. USD last week, crashing to -25.5% in the last month
Yes, I am Canadian. And yes, during my weekends, I measure and map Sri Lanka alongside Canada’s Loonies. When your risk management process scales across ALL country and factor exposures, you’ll see things much differently than Macro Tourists do.
But KM, “why, why, why” does the Canadian currency signal the opposite of the Japanese currency? I don’t really care why, but if you need to tell yourself why, it might be because Canada has Oil (Japan doesn’t) and it just busted a move back to Bullish TRADE and TREND.
And “why” on Oil up another +3.9% this morning to $109 WTI? I don’t know, but maybe its inflation is partly because of the war’s weekend escalation? Again, I don’t care why as much as I care about WHEN. What’s interesting about Oil’s Signal is:
A) Oil (WTI) initially broke @Hedgeye TRADE support of $100.28/barrel on “peace talks” earlier last week… and
B) Ended up closing down -4.2% week-over-week, but ramped back above TRADE resistance on Friday
So, as of this morning, that keeps me bullish on both Oil and Energy Longs (XLE) because those signals are Bullish @Hedgeye TRADE and TREND. When I pop higher Oil prices into our USA GDP Nowcast, it slows REAL US Consumption growth, flattens the curve, and:
A) Has me licking my chops Shorting Consumer Discretionary (XLY) which was +9.1% last week on Counter TREND bounce alongside
B) Tech (XLK) which had an even bigger bear market bounce of +9.6% week-over-week AFTER crashing into Monday’s YTD lows
What would you rather buy more of this morning?
A) Energy Stocks (XLE) which were on sale, down -3.9% week-over-week to +35.9% in the last 3 months or
B) Consumer Discretionary (XLY) stocks which still have a TRENDING drawdown of -6.9% in the last 3 months
Personally, I ride TRENDs until I get a Signal & Quad Shift.
The probability of shifting into Quads 1 or 2 in Q222 (where I’ll be long Consumer Discretionary) is close to 0%. If you ask the CTAs and chartists who were chasing Tech (XLK) into my SELL signal at 3:35 PM on Friday in Real-Time Alerts what a Quad is, they’ll think ATVs.
What if I’m wrong? Well, then I’m wrong. I certainly didn’t look “right” on Thursday and Friday. Then again, per the chart guys, I “looked” really wrong when I was buying-the-damn #Quad2 dips in QQQ back in March of last year, eh?
I know. What do I know? That’s like three careers ago, ha.
But you all know that my career will always be about staying with my #process. Historically, there has been a LARGE difference in the amount of short-term noise the crowd “sees” and The Quad that ultimately plays out as the intermediate-term Cycle TREND.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.81-2.24% (bullish)
UST 2yr Yield 1.57-2.06% (bullish)
High Yield (HYG) 79.68-82.83 (bearish)
SPX 4081-4484 (bearish)
NASDAQ 12,360-13,997 (bearish)
RUT 1 (bearish)
Tech (XLK) 138-156 (bearish)
Energy (XLE) 70.71-79.22 (bullish)
VIX 22.16-36.73 (bullish)
USD 97.66-99.63 (bullish)
EUR/USD 1.082-1.114 (bearish)
USD/YEN 116.32-120.21 (bullish)
GBP/USD 1.297-1.328 (bearish)
CAD/USD 0.775-0.797 (bullish)
Oil (WTI) 89.99-121.32 (bullish)
Gold 1 (bullish)
Bitcoin 36,591-42,590 (bearish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
