“When a champ has only physical ability, he is incomplete.”
-Rickson Gracie
At the highest level, have you played on a championship team? Not everyone has for a reason. Your skills only get you so far. I’ve seen plenty of extremely intelligent people fail playing this game.
As world champion Rickson Gracie goes on to explain in Breathe: A Life In Flow, “If you are a champion and you rely only on your ability, you won’t be a champion for long… That’s the difference between a champion who is stagnating and one who’s dynamic…
After tennis great Roger Federer lost a few matches and felt that his competition was catching up to him, he reinvented himself. He studied his swing and began to hit the ball closer to the ground. The reason race car driver Ayrton Senna was such an inspiration was that he was a champion whose mind never stopped spinning; he was never content with his performance, even when he was winning.” (pg 179)
Back to the Global Macro Grind…
How many players, firms, etc. who play this game at the highest level have evolved, dynamically, across this Full Investing Cycle? How many have evolved their Asset Allocation and Risk Management #processes across multiple cycles?
If you don’t know the answers to those questions, good. That’s our opportunity. This is one of the few MAJOR professions remaining in both America and abroad that has generally not evolved alongside fractal computing, behavioral analysis, etc.
But our profession knows everything about ”AI”!
There are many directions I could go with this morning’s rant, but I’ll stop after I make this next observation/point: most of this cycle’s “bears” are somewhat inexperienced and struggle mightily risk managing (trading) their shorts.
‘KM, can you believe this market move – this market is so expensive, this is such a joke.’
If that’s been texted, emailed, or said verbally to me 1,000x in the last 18 months of our signaling #Quad4, it’s been 10,000x. It’s part of the #behavioral struggle we all have as human beings. But there’s definitely a way to stop behaving and/or thinking that way.
In the short-term (our TRADE duration), markets don’t trade on “valuation”:
A) They trade on the flow of The Machine … and
B) They trade/fade consensus positioning
They, of course, trade on many other factors (incoming macro and/or company data, geopolitical events, etc.), but I think you should take a good long look at both your in-game behavior (your feelings) and decision-making relative to what A) and B) are doing.
It’s helped evolve my game, tremendously.
And that doesn’t mean I think I’m the best at The Game. Get over yourself (if that’s what you were thinking!). What it means is that I know I’m a much better version of myself. And that’s all I really care about, evolving and improving my game.
So let’s dig into a layer of The Machine’s Flow by revisiting the “Baskets” that I’m always measuring and mapping in-game:
A) Goldman’s Non-Profit Tech Basket had a follow-through squeeze of +2.1% yesterday … while
B) The Bitcoin Sensitive Equity Basket sold off -2.2% yesterday
Why? I don’t really care why (coaching myself to consider WHEN over WHY was a major evolution for me), but for going on 18 months of this, it’s been typical of bear market squeezes to end with the lowest quality (profitless companies) getting squeezed last.
Think about the #divergence. Even Bitcoin (down -6.1% in the last month) and Crypto is more concerned about The Cycle #slowing at this point during #Quad4 in Q2 than uniquely American FOMO in everything “AI.”
Then reality gets reported overnight (AI, OKTA, CRWD, etc. all down double digits post earnings reports), and yesterday’s best “Basket” becomes the worst after probing the TOP-END of its RISK RANGE.
Yes, I went all CAPS on you on that last bit.
Why do you think I evolved and created my proprietary Risk Range™ Signal? A: in order to fade MY FEELINGS. Yes, most power-users of my #process say that if they could have 1 thing on their desktop, it’s my Risk Range™ Signaling model in real-time.
So, as an example on trading/fading consensus positioning:
- I use my Risk Range™ Signal to trade/fade the daily direction of the market
- At the TOP-end of the Risk Range™ Signal, I sell/short
- At the LOW-end of the Risk Range™ Signal, I buy/cover
That’s it.
You could tell me Jesus Christ himself was coming over for dinner tonight and I’d fade that if the expectation was coming from the TOP-end of my Risk Range™ Signal. Similarly, on my shorts, if you told me the world was going to end today, I’d still cover-SOME at LRR!
*LRR = LOW-end of my Risk Range™ Signal.
So, that’s what I did in a bunch of shorts yesterday (yes, real pros who win championships on the Short Side during #Quad4, have a diversified Short Book that is properly timed and sized).
And no, I don’t cover-ALL, like some rookie. I cover-SOME and make sure to not cover-below-my-MINIMUM so that I’m still making money if things that are crashing (like my Energy and US Retailer Shorts, for example) keep crashing.
Examples of what I was covering on the short side yesterday: XRT, XLY, IWM, XOP, XLF, XLI, KRE, EWI, EWA, EWO.
By the way, send the KM Basket of those 10 shorts to Telecom Tom or whoever blew people up last year and ask them to tell you how and why that basket is signaling the new “bull market” LOL. I love to tweet and chirp. I love this game!
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 3.83-4.01% (neutral)
UST 10yr Yield 3.55-3.82% (neutral)
UST 2yr Yield 4.11-4.60% (bullish)
High Yield (HYG) 73.38-74.69 (bearish)
SPX 4082-4222 (bearish)
NASDAQ 12,458-13,053 (bearish)
RUT 1 (bearish)
Tech (XLK) 155-168 (bullish)
Shanghai Comp 3160-3277 (bearish)
Nikkei 30,467-31,396 (bullish)
VIX 16.62-20.39 (bullish)
USD 102.80-104.81 (bullish)
EUR/USD 1.066-1.084 (bearish)
USD/YEN 137.30-141.23 (bullish)
Oil (WTI) 67.26-72.68 (bearish)
Gold 1 (bullish)
Copper 3.52-3.75 (bearish)
Bitcoin 26,006-27,923 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
