This note was originally published at 8am on September 20, 2011. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Habit will be your champion.”
I covered some shorts and got longer again yesterday (14 LONGS, 8 SHORTS in the Hedgeye Portfolio) because that’s what my process was telling me to do. Coming into the day we were long the US Dollar and effectively long the American Consumption that’s associated with a strong US Dollar.
Strong Dollar Deflates The Inflation. Period.
Habit, discipline, process – these things matter. Since I am a hockey head, our competition likes to think that they can work less hard than us because they are smarter. Smart is as smart does. And as the great Spartan officer Dienekes went on to say in Gates of Fire, “habit is a mighty ally.”
“The habit of fear and anger, or the habit of self-composure and courage” (Gates of Fire, page 139). As a professional Risk Manager, what are your habits?
Self-composure in a down market is as critical as not getting angry about getting squeezed on the short side in an up one. This morning’s headline “news” is that Italy is being “downgraded” by one of the most lagging of lagging indicators – a ratings agency. Italian stocks are down -39% since February. S&P’s view is not new “news.” Stocks rallying on the “news” is…
Courage is building a team and a risk management process that includes people other than yourself. In a globally interconnected marketplace, you have to be able to trust and depend on both your teammates and sources – or just get new teammates and new sources. Collaboration of experience is the only path to victory. Individualism dies young in this market’s battlefield.
Back to the Global Macro Grind…
Let’s start with what we’ve called The Correlation Risk. That’s the risk that QE2 would inflate asset prices and that a policy to inflate would perpetuate Growth Slowing. Check, check, check. That’s your 2011 Global Growth Slowdown. It’s old news.
What happens if we reverse the causal mechanism in inflating commodity prices? What happens if we strengthen the US Dollar? Bottoms are processes, not points, but yesterday was a very good day not only for American Consumers but for Global ones:
- US Dollar Index held its long-term TAIL of support = $76.45
- CRB Commodities Index (asset inflation) got blasted for a -1.8% drop on the day
- WTI Crude Oil prices broke my immediate-term TRADE line of support ($86.96) and moved back into a Bearish Formation
Despite the SP500 being down -1% yesterday, the Consumer Discretionary Sector (XLY) closed up +0.24% on the day (the Energy Sector was down -0.88%). That, and Chinese/Indian equities rallying on the Italy “news”, made perfect sense to me. New “news” to the 95% of this world that couldn’t care less about Ben Bernanke is that prices at the pump are going down.
Is that good for Energy, Financials, or Basic Materials stocks? No. Is it good for Consumer and Healthcare stocks? Yes. What’s best for Americans, Indians, and Chinese? Policies to inflate? Or a strong US Dollar that Deflates The Inflation?
Don’t ask your local Washington/Wall Street revisionist “economist” about that. Ask The People.
From a sentiment perspective, and I highlighted this in last week’s Early Look, the other people (Wall Street consensus) are getting really bearish after global market prices have melted down. This shouldn’t be a surprise. This is the habit of fear and anger that you want to avoid in both your professional and family life.
Last week’s Institutional Investor Sentiment Survey showed the nastiest bear growl that we have seen in 2011. For the first time this year, the Bears outnumbered the Bulls. And not by a little – by a lot:
- Bulls dropped from 39% in the week prior to a fresh YTD low of 35.5%
- Bears ramped from 38% in the week prior to 41%
- The Bull/Bear Spread flashed a Buy Fear signal at -550 basis points wide (Bulls minus Bears)
At the same time, both the Volatility Index for US stocks (VIX) broke its TRADE line of support (34.67) and the SP500 rallied above its TRADE line of resistance (1180). On the margin, that’s more bullish than it is bearish. It would take a 2011 Bear to know.
To be clear, these are immediate-term TRADE signals (3 weeks or less in duration). But every risk management point should have a but, and every TREND is born out of a TRADE. If the US Dollar Index continues to hold TREND line support ($74.62), I’ll continue to have the courage to buy and cover on red days. Selling on green is the easy part.
My immediate-term support and resistance ranges for Gold, Oil, Germany’s DAX, and the SP500 are now $1769-1819 (Gold’s immediate-term TRADE line of $1819 is broken), $86.03-86.98, 5029-5527, and 1187-11228, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer