Markets Are Crashing (again)

“They discover that the straight line they extrapolated did not lead to the future after all.”
-Neil Howe

They lost a lot of money yesterday. They’ve been losing a lot of money in “stocks” since August. They’ve been losing lots and lots of money in bonds since we went bearish on The Cycle in JAN of 2022 too.

We aren’t they. We have our risk management #process. We don’t subscribe to a generation’s dogma about what being “fully invested” and chasing short-term “charts” means. We aren’t what they want/need us to be.

There is much more to this than markets. As my Partner, Neil Howe, goes on to explain in The Fourth Turning Is Here: “These parallel rhythms – in politics, society, culture – never stop beating. And, so long as we keep extrapolating along straight lines, they never stop taking us by surprise.” (pg. 147)

Back to the Global Macro Grind…

One of the foundational principles of how I model and risk manage markets is to NEVER assume normal distributions and/or extrapolate straight lines.

By definition, market crashes are non-linear moves. They crash from “oversold” levels…

What markets are crashing? Let’s start with the two big ones:

1. The US BOND MARKET
2. The US STOCK MARKET

Go back to when we signaled bearish on The Cycle (JAN 2022):

1. The UST 10yr Yield has gone from 1.5% to 5% at its Cycle Highs
2. The Russell 2000 has crashed from 2442 to 1651 from its Cycle Peak

If you have friends who haven’t done the math on that in their “60/40” 401ks yet, here’s part of it:

1. BONDS: Long-term Treasuries (TLT) have crashed -44% from their 2021 Cycle Peak
2. STOCKS: A broad basket (Russell 2000) has crashed -32.4% from its 2021 #MOAB Cycle Peak

What is #MOAB? A: The Mother of All Bubbles that assumed free money printing extrapolated into forever.

Oh, you have friends who don’t have the 60/40 Portfolio or a “Target Date” Fund for their retirement? Right. Those are the CNBC types who didn’t own Phase 1 of the NASDAQ Crash of 2022 and went to a 90% Asset Allocation to QQQ on JAN 1, 2023.

#Cool.

Well, hate to break it to them, but even the QQQ re-entered Crash Mode yesterday, at -20.2% from its #MOAB Cycle Peak.

Huh? Yep. True story. And it’s also true that if your hard-earned capital crashes -20%, you need to be up +25% (from here) to get your money back to breakeven. If you’re down -44%, you need to be up +78% to get back to breakeven.

Oh, so you have other friends who just went from -18% in SPY in 2022 to a 100% Asset Allocation there in 2023? Great. They’re up +9% in 2023 and only have to be up another +11% from here to get their pile back to break-even.

I’m not here to sugar coat things and/or make you “feel” good. I’m here to help you risk manage your hard-earned capital so that:

A) You don’t see it crash and burn … and
B) You can compound returns on that capital for your Full Investing Cycle life

If you need to “feel” good, our new Long Only Portfolio Solutions product was UP yesterday.

Up? No way.

Yep. Up. And I’m within 0.25% of hitting my ATH before my ball hoggers (FDRXX, TBIL, TFLO, BUXX) hit #PayDirt next week.

Here were the Top 10 of my 26 (re-ranked by SIZE for you daily in that product) positions yesterday:

1. FDRXX (held in Money Market High Yielding Cash at Fidelity)
2. TBIL (3 month Treasuries)
3. TFLO (floating rate Treasuries)
4. BUXX (enhanced yield)
5. US Dollar (UUP)
6. Large Cap Energy (XLE)
7. Oil (USO)
8. CTA (Managed Futures)
9. PFIX (Interest Rate Hedge)
10. IVOL (Bear Steepener)

Is that what “they” own? A: Nope. Should you care what they own? A: Nope.

What YOU should care about is what YOUR risk management and Full Investing Cycle #process is. You shouldn’t care about others and/or their conflict of interest, one-way, Perma Bull S—t is pushing to you, daily, on CNBC.

In US Equities, this is the 3^rd Full Investing Cycle Crash I’ve been on the right side of in the last 25 years (there have only been 3). This is the 1^st Full Investing Cycle Crash I’ve been on the right side of in US Treasury Bonds (there has only been 1).

There is only 1 #process that gets you #out of these major Asset Allocation crashes. It didn’t happen in a straight line either.

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

UST 30yr Yield 4.81-5.21% (bullish)
UST 10yr Yield 4.67-5.09% (bullish)
UST 2yr Yield 4.98-5.24% (bullish)
High Yield (HYG) 71.34-72.90 (bearish)            
SPX 4133-4315 (bearish)
NASDAQ 12,675-13,331 (bearish)
RUT 1 (bearish)
Tech (XLK) 160-167 (bearish)
Energy (XLE) 86.48-92.99 (bullish)
Utilities (XLU) 57.10-60.50 (bearish)                                               
Shanghai Comp 2 (bearish)
Nikkei 30,502-31,877 (bearish)
BSE Sensex (India) 63,106-65,766 (neutral)
DAX 14,615-15,226 (bearish)
VIX 16.77-22.91 (bullish)
USD 105.45-107.11 (bullish)
EUR/USD 1.048-1.066 (bearish)
Oil (WTI) 83.45-89.57 (bullish)
Nat Gas 2.85-3.45 (bullish)
Gold 1 (bullish)
Copper 3.42-3.64 (bearish)
Bitcoin 29,512-36,220 (bullish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer