“The future isn’t a reality – it’s a projection.”
- Dan Sullivan
That’s an important risk management quote from a great #behavioral & coaching book that I have been citing: The Gap And The Gain, by executive Coach Dan Sullivan and Dr. Benjamin Hardy.
Sullivan & Hardy explain the importance of “Reality Measured Backward.”
That really spoke to me because every economic projection we have is based on the Base Effects (i.e. measuring backwards and back-testing using a Bayesian overlay process).
And every #VASP Signal I have is based on volatility that’s been realized within the context of The Cycle that’s been reported.
“The only way to measure goals is backward, against the past. Use the reality of where you currently are and measure backward from there to the reality of where you started.” (pg 7)
Back to the Global Macro Grind…
No matter where you started 2022, The Economic Growth Cycle peaked in November of 2021. Everything that was getting “priced in” yesterday reflected the reality of every economic data point that slowed from January to May.
Today is May the 10th … and no matter what the reality of your performance has been, your positioning today will reflect where you stand tomorrow. I don’t know what’s going to happen tomorrow. But I do know how I am positioned.
Do I have to “be right” (intellectually) on what should be another #Quad3 economic report (CPI)?
Nope. If I was positioned for #Quad3 yesterday, I would have gotten killed (#Quad3 is when you’re long MEGA Cap Tech, Crypto, etc.). You can’t get “tapped on the shoulder” if you have Luna Coin tattooed to yours.
Positioning for Deep #Quad4 is obviously what kept us in the gain. Here are the updates on #Quad4 crashes and emotional gaps:
A) Bitcoin has crashed -54% from its #Quad2 Cycle Peak
B) Russell 2000 has crashed -27.8% from its #Quad2 Cycle Peak
C) NASDAQ has crashed -27.6% from its #Quad2 Cycle Peak
Looking backwards:
A) #Quad2 economic data peaked (in rate of change terms in November of 2021)
B) Bitcoin and The Russell Small Cap Factor Exposure peaked on the same day (November 8th, 2021)
C) NASDAQ peaked, right on the screws when the Growth Cycle data did, on November 19th, 2021
Reality Measured Backwards gets a LOT easier to see the further time and space takes you from critical turning points in The Cycle. Why? Because The Cycle cycles. As the Base Effects steepen, the probability of future #slowing rises.
No, that doesn’t mean the future Quads are not projections. They are.
That’s why we employ both a stochastic modeling and Bayesian inference process to measure and map The Cycle. As the economic data and my #VASP signals change, I change my positioning.
What does consensus do?
Well, we know what they don’t do. They don’t use my #VASP Signals & The Quads as their principle orientation. That’s a good thing. If consensus did The Quads, we wouldn’t be winning against the crowd.
What are some of the most important ROC (rate of change) data points that changed in the last 24 hours?
A) China Exports #slowed big time to +3.9% y/y in APR vs. +14.7% in MAR (6th straight month of decline)
B) Shanghai Shipping Rates to USA (West) just disinflated by -10% month-over-month
C) US Covid Cases #accelerated big time to +160% week-over-week and +33% month-over-month
What does that mean for our projection for a Deep #Quad4?
- It means the Global #Quad4 projection’s probability just went up for 2H of 2022
- It means the probability of headline US Inflation peaking in April-May of 2022 is rising
- It means we may have another Real Consumption Shock to deal with in America
Or not.
The more reps and cycles I have playing The Game, the less I care about being “intellectually right” on why. I care much more about WHEN. When do we cover-SOME shorts? When do we press those shorts (again) like we did on the Fed Day rally last week?
I don’t use my “feelings” or “valuations” to answer those critical questions. I have live (and non-linear) fractally derived Risk Range™ Signals that guide me. Throughout the market day those Risk Range™ Signals refresh for realized volatility.
As the market was realizing a 41.43 level of NASDAQ Volatility at yesterday’s close, did implied volatility for something that consensus owns (Tech, XLK) signal outright panic and capitulation by The Growth Bulls? Nope.
Implied Volatility for Tech (XLK) actually priced at a -6% DISCOUNT to 30-day realized volatility and something WIDELY held like Amazon (AMZN) went out at a complacent -13% DISCOUNT.
Per the Prime Brokerage data that I measure and map, Long Onlys finally started selling broadly held #BubbleCaps like TSLA, AMZN, MSFT, and APPL yesterday. Total US Equity Volume was +18% vs. the 1-month average, partly for that reason.
The other big reason why consensus is selling is to try to get on the right side of history. That’s the other thing about cycles that slow from Asset Bubble Peaks. Their Full Investing Cycle Return History isn’t a Portfolio Manager’s projection, it’s their reality.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 2.76-3.16% (bullish)
UST 2yr Yield 2.52-2.80% (bullish)
High Yield (HYG) 76.41-79.12 (bearish)
SPX 3 (bearish)
NASDAQ 11,408-12,628 (bearish)
RUT 1 (bearish)
Tech (XLK) 133-144 (bearish)
VIX 27.11-37.96 (bullish)
USD 101.81-104.44 (bullish)
Oil (WTI) 98.21-110.23 (bullish)
Gold 1 (bullish)
Copper 4.11-4.48 (bearish)
MSFT 261-280 (bearish)
AAPL 148-160 (bearish)
AMZN 2041-2493 (bearish)
TSLA 761-885 (bearish)
Bitcoin 30,047-37,708 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
