This note was originally published at 8am on April 11, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“Here yesterday, gone today.”
Yesterday’s Early Look note about my Pile yielded some very thoughtful replies. I don’t do this enough, but I’d simply like to say thank you - thanks to all of you who take the time to send me your thoughts. I read each and every one of your emails. I learn from you every day.
Going back to the well this morning, here’s what came out of my Pile on last night’s flight to Kansas City, Missouri:
- Jeremy Grantham: “Longest Quarterly Letter” (February 2012)
- Niall Ferguson: “Western Civilization – Decline or Fall?” (March 2012)
Grantham’s long-term quibble is one we write about a lot – getting quantitatively oriented: “It would certainly help if the general public were better educated, especially in science… it is said that 8 of the 9 senior leaders in China’s government are scientists. At that high a level, of our 535 Congressmen and the President, less than a handful – arguably only 2 or 3 – would pass the test.”
Ferguson’s thoughts preface his latest book. They’re very much in line with Grantham’s when it comes to reminding the American People, Media, and Markets to wake-up to a non-US centric world before history’s lessons really start to rhyme: “The bad news is that its shape is more like an exponentially steepening slope that quite suddenly drops off like a cliff.”
Two of the world’s Top Economic Historians warning us that The Fed and Congress have un-qualified opinions and un-checked policies that infect globally interconnected markets, every day. Think about it.
Back to the Global Macro Grind…
“Here yesterday, gone today”, whatever happened to that no-volume “bull market” in US Equities?
Instead of calling a trivial 1-factor model like the 50-day Moving Monkey a risk management process, let’s get real with the 21st century here and get quantitative. Multi-factor, Multi-Duration is what we do and using a very simple 3-factor baseline model, here’s what we see in the SP500:
1. PRICE – since immediate-term TRADE support (1391) snapped, our intermediate-term TREND line (1331) is now in play. Managing your risk within this dynamically evolving range of 1331-1391 is how you should think about gross and net exposure.
2. VOLUME – there was no volume on the elevator up, and now that it looks like some are taking the window route on the way down, we’re seeing Volume Studies confirm the gravity of the situation. Yesterday’s volume was an animal, up +46% day-over-day! And up +15% versus my composite average of market down days in 2012.
3. VOLATILITY (VIX) – since immediate-term TRADE (16.24) and TREND (18.76) resistance are now support, US Equity Volatility can continue to put on one heck of a move from here, provided that 18.76 holds. It’s critical to acknowledge that our long-term TAIL zone of 14-15 VIX support held like the rock of Gibraltar, again.
Now if you only look at US Equities through the prism of the SP500, you’re missing part of the point. Looking at the correction in the SP500 versus the Russell2000, you can start to see what index is overweight Apple:
- SP500 – stopped going up on April 2nd(1419) and has since corrected -4.3%
- Russell2000 – stopped going up on March 26th(846) and has since corrected -7.3%
Unlike the SP500, which is holding its intermediate-term TREND line of 1331 support, the Russell2000 has already broken its TREND line of 795. So, inasmuch as you should be watching 1391 resistance in the SP500 today/tomorrow, watch 795 in the Russell.
There’s 0% irony that when Small Caps (Russell2000) stopped going up on March 26th, the following occurred:
- CRB Commodities Index stopped going up at 326 = down -8% since
- Japanese Equities (Nikkei225) stopped going up at 10,255 = down -8% since
- US Equity Volatility (VIX) stopped going down at 14.24 = up +43% since
Got an “exponentially steepening slope” (turn the VIX upside down), that “suddenly drops off like a cliff”? Got Apple? Got Global Macro Risk Management?
After cliff diving from the Q1 highs in 2008, 2010, and 2011, how many more times do we have to do this? Do you blame the little guy (Old Wall Street still calls her the “Retail Investor”) for not getting sucked into the Storytelling vortex of another Q1 high?
“And if you still doubt that collapse comes suddenly, just think of how post colonial dictatorships of North Africa and the Middle East imploded this year… One minute rulers had legitimacy in the eyes of their people, the next they did not.” (Ferguson)
When it comes to managing what’s left of their own money, The People of America do not appear to be as mathematically inept as either their Congress or Central Planner in Chief. In the long-run, if you break the trust of The People in markets, volumes are dead.
My immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar Index, Russell2000, and the SP500 are now $1618-1668, $116.92-123.12, $79.58-80.28, 774-795, and 1347-1391, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer