“Embrace reality = accurate appraisal of demands + accurate appraisal of our abilities.”
-Steve Magness

That’s one of Magness’s mental “Toughness Maxims” in a book that my new teammate, David Salem, had me read called Do Hard ThingsWhy We Get Resilience Wrong and The Surprising Science of Real Toughness.

Are you mentally tough? Are you aware of your abilities? Can you be as bearish as I am on the pending #Quad4 US Recession, incorporate the new reality of #0DTE order flow, and lean Net Long at particular moments in The Game?

I know what I can do. It’s up to you to figure out what you can do. It’s not easy. As Magness goes on to write, “a key component of real toughness is acknowledging when something is hard, not pretending it isn’t.” (pg 53)

Risk Managing 0DTE vs. The Cycle - 02.07.2023 soft landing cartoon

Back to the Global Macro Grind…

For the first game in a while, I didn’t lose money yesterday on a #0DTE order flow SPY ramp. It was Game 25 of 2023 (yes, we’re only 10% of the way into 2023 Season) and I was getting Net Longer on a red open.

Those buy/cover orders were executed minutes before I was going to present 142 slides of Revenant Bearishness

Think about that. Did you do that? A: No. While you may have done what I did (buy/cover on Day 3 of DOWN US Equity Beta) in your Long/Short Book, you definitely didn’t spend 1 hour telling anyone who paid to listen that this ends in tears.

Then, I had to SELL-SOME of what I bought and covered (on green in the afternoon), in between 3 client calls!

While you can’t see every move I make with my hard earned capital, you could see all of it happen directionally in Real-Time (Coaching) Alerts. It happened. It’s all timestamped. And it had NOTHING to do with The Cycle.

I’ll come into today’s open running +2.7% Net Long with 5 Longs and 6 Short in Real-Time Alerts.

Yes, I know. I drive some of you crazy with my short-term moves. I drive some of you crazier with my longer-term Phase III of The Bear Market outlook. All the while, I don’t do crazy. I just drive.

Embrace Reality. This #0DTE Order Flow is real. You either adjust your game for The Game within the game or you don’t.

So what happened?

A) From the intraday low in SPY to the closing highs, was it a bird, a plane, or Powell?
B) Or did someone start ramping into 412, 413, then 415 FEB7 #0DTE SPY Call Options and Sell Vol?

A: Alex, I’ll take B) for no money lost in my Long/Short Book on the day.

Reality: over 258,000 of the 415 SPY line Call Options traded yesterday and they pinned a 415 SPY close.

Fiction: “Powell looked dovish.” LOL

That’s the 2nd day in the last 2 weeks where my Contra Stream started the day with their live tweets that “Powell is going to be hawkish” (because SPY was red), and ended the day saying “he looked dovish” (because SPY was green). LOL

Reality: Powell didn’t say anything new. He was hawkish.

Fiction:well, you see he might sound hawkish, but that’s all priced in now … and since it’s going to be a soft landing… and earnings and jobs are better than expected, you gotta buy stocks.”

Here’s my answer to that (in less than 142 slides that we presented on yesterday’s Mid Quarter Update call):

  1. UST 2YR Yield has gone from 4.09% to 4.47% in a straight line post the Jobs Report – that’s outright hawkish
  2. EVERY other time COST of Capital Go Up into a Recession (for 13 months) it wasn’t “priced in”
  3. “Soft Landing” is to my Recession outlook as “Transitory” was to my Inflation outlook when CPI was at 2%
  4. “Nosebleed NFP Reports In The Months Preceding Recession Are Not Historically Anomalous” (slide 46)
  5. SPX year-over-year Earnings have dropped -700 basis points from last Q to this one. Was it priced in in AUG?

If and WHEN SPX Earnings go from -3% y/y to -8-15% (from here), will 4200 SPX have been “priced in”?

During 1 of 3 Institutional Client calls yesterday, one of my Top Performing Hedge Fund Clients of 2022 said, “KM, you’re the only one next to maybe Mike Wilson who is getting more bearish right now – most have new narratives.”

I said, “Cool, thanks. Most haven’t successfully navigated a recession or bear market never mind 3 of them, so that doesn’t surprise me. Neither do their narratives. That’s why I’m long today, but will get less long after this call.”

I also told him that if I could risk manage everyone’s Long/Short Book through this #0DTE Call Option Bubble, I would. But, back to reality, I can’t. The best I can do is show people how to maintain opposing thoughts in my head and execute.

Hope is not a risk management #process, but I hope to get Net Short around SPX 4203 (i.e. the top-end of my Range).

Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets

UST 30yr Yield 3.52-3.75% (bearish)
UST 10yr Yield 3.34-3.69% (bearish)
UST 2yr Yield 4.11-4.51% (bullish)
High Yield (HYG) 75.05-77.21 (bearish)            
SPX 3 (bearish)
NASDAQ 11,172-12,224 (bearish)
RUT 1 (bearish)
Tech (XLK) 131-145 (bearish)
Defense (ITA) 112-116 (bullish)
Gold Miners (GDX) 29.17-33.51 (bullish)                                               
Shanghai Comp 3 (bullish)
VIX 17.69-21.05 (bullish)
USD 101.20-104.42 (bullish)
Oil (WTI) 72.31-79.13 (bearish)
Nat Gas 2.27-2.96 (bearish)
Gold 1 (bullish)
Copper 3.99-4.33 (bullish)
Silver 21.94-24.70 (bullish)
Bitcoin 19,991-23,885 (bearish) 

Best of luck out there today,

Keith R. McCullough
Chief Executive Officer

Risk Managing 0DTE vs. The Cycle - WCOD