“There are rules and algos that are biased, but people have biases too.”
- Danny Kahneman
That’s a simple but good quote from one of the more important #behavioral books that I have studied in the last few years. In Noise – A Flaw In Human Judgement, Kahneman goes on to ask “can we design algorithms that are both noise-free and less biased?” (pg 337)
A: Yes. My teammates and I have been working on this for the last 15 years. While the quantitative component of our research will never be done, front-running the behavioral component is easily the most exciting part of my trading day.
Especially vs. the “fundamental” Long/Short community (Long Only too, but they move far less fast and trade the options portion of The Machine’s daily flow far less too), a Quantamental Long/Short Strategy like mine has plenty of passes to pick off.
Back to the Global Macro Grind…
Welcome to Day 1 of another NFL Season where the boys who play The Game at the highest level get paid a lot of money to pick people off (so I hope you hedgies out there don’t mind me wanting the ball too!).
What does a pick-6 look like in The Game we play?
A) When you SELL/SHORT on green, and the next big move is LOWER
B) When you BUY/COVER on red, and the next big move is HIGHER
Also known as Fading, this has turned into one of the most profitable parts of The Game, if you play it using my immediate-term TRADE decision making #process.
What are the best fades?
A) Fading Squeezes (i.e. short-term bounces) in bear markets
B) Buying The Damn Dips (i.e. short-term Counter @Hedgeye TREND corrections) in bull markets
Examples?
A) Fading anyone’s “fundamental” GROWTH “picks” from Crypto to Tam-Tam Stocks since January of 2022
B) Buying The Damn Dips in the US Dollar every single time someone’s Single Factor Moving Monkey breaks in 2022
Whether MANY “fundamental” Long/Short Equity Managers want to admit it or not, theyir biases are often grounded in the “fundamentals of the company research” they’ve labored through, management meetings, etc.
On the CTA (or no-fundamental-research-just-chart-chasing) front, EVERY order is directionally chasing a Single Factor (PRICE MOMENTUM) “model” that a high school student could build for me.
Since I have zero CTA clients, I just risked zero capital in stating that truth.
The best performing Long/Short Hedge Funds over the course of the last 2 years have had a MULTI-FACTOR, Multi-Duration, Quantamental Strategy that had them LONG #Quad2 at this time last year and SHORT #Quad4 this year.
They aren’t constantly chasing price. They are fading it. And have no problem doing the opposite of what worked last year.
Yesterday’s US Equity Market Example (here were the Top 2 performing Goldman Baskets):
A) “Most Short Basket” = +4.37% on the day
B) “Unprofitable Tech Basket” = +4.04% on the day
If you had a great day yesterday (i.e. long those 2 baskets, short the US Dollar, etc.), you’ve had a horrendous 3 weeks.
Now what about noises? When you trade your books, do you have those in your head? I do. I fade them too. How about Politically Biased #Noise? The blatantly biased Lael Brainard said something yesterday about the Fed “over-tightening.”
LOL. Now you tell us, Lael, bud? Apolitically, it’s called The Fed TIGHTENING into a #Quad4 Recession!
BREAKING: “Fed Inflation Battle to Spur Greater Economic Harm Than Realized”
That’s the #1 “story” on Bloomberg.com this morning. That’s not only the definition of rear-view looking noise, but would have been a useful risk management scenario for the Fed’s Brainards to have painted to The American People pre markets crashing.
Even if The Fed were to completely do the opposite of what is now expected at the SEP 21 HIKE meeting (a +75bps hike), do you think they’d be able to reverse the GS Profitless Tech Reality and Real Vision’s Crypto Cons back into the black?
Ok, you’re right. Those jokes aren’t Quantamental. I’ve gone too far. They were just part of The Mother of All (Fed induced) Bubbles.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 2.96-3.36% (neutral)
UST 2yr Yield 3.31-3.55% (bullish)
High Yield (HYG) 73.20-75.96 (bearish)
SPX 3 (bearish)
NASDAQ 11,213-12,168 (bearish)
RUT 1 (bearish)
Tech (XLK) 127-139 (bearish)
Utilities (XLU) 73.60-77.49 (bullish) `
Shanghai Comp 3165-3260 (bearish)
Nikkei 27,259-28,593 (bullish)
VIX 22.59-29.15 (bullish)
USD 107.90-110.41 (bullish)
EUR/USD 0.988-1.006 (bearish)
Oil (WTI) 81.06-91.08 (bearish)
Nat Gas 7.70-9.90 (bullish)
Copper 3.30-3.61 (bearish)
Bitcoin 18,208-21,563 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
