This note was originally published at 8am on May 17, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.
“The happiness that Jack and Jill experience is determined by the recent change in their wealth.”
Across Global Equities and Commodities, this morning our Globally Interconnected Macro Models are signaling the best immediate-term TRADE oversold signal we’ve had in 2012. The perma-bulls have been under siege for 2-3 months. Happiness from their February-March highs is oversold too.
In Chapter 25 of Thinking, Fast and Slow, Kahneman does a great job debunking one of the many dogmas of modern economics. He calls it Bernoulli’s Error – and it’s one that’s pervasive in our profession today. It’s the classic mistake of generalization in assumptions when it comes to utility curves and expectations.
“Bernoulli’s theory assumes that the utility of their wealth is what makes people more or less happy. Jack and Jill have the same wealth, and the theory therefore asserts that they should both be equally happy, but you do not need a degree in psychology to know that today Jack is elated and Jill is despondent.” (page 275)
Back to the Global Macro Grind…
At the end of March, if Jack bought Chinese stocks (my son Jack indirectly did), and Jill bought US stocks, Jack is up +5% and Jill is down 7%. So, even if I had a daughter named Jill, Jack would be relatively happier than her if they were going shopping this morning.
If Jill’s Dad was right levered up long in everything US, Asian, and European stocks… and he had a side pocket of Gold, Oil, and maybe a special situation basket that included long JC Penney… Jill and her Dad are going to be eating hot-dogs instead of steaks this summer.
Anyone who has run real-money under the real-time performance pressure cooker for the last 5 years knows precisely what I am talking about. Timing Matters. If you buy high and are forced to sell low, you could wreck your year in a very short period of time.
What does immediate-term TRADE oversold mean?
- It doesn’t mean we are all bulled up about Global Growth Accelerating
- It doesn’t mean we are bullish on our intermediate-term TREND (3 months or more) duration either
- It means that, on a 3 factor basis (price, volume, volatility), stocks and commodities are simply oversold
So the first thing I do with that is start covering short positions. That gets me longer on a net basis. Then I start to slowly take up my gross invested position, selectively, in our best ideas.
I’ve screwed this up enough times to know that you really need to wait and watch on that second part. Your gross long exposure to the market is where you can get run-over; particularly if the market continues to trend lower with no mean reversion bounce.
The good news for US Stocks is that has already happened:
- US Dollar Index has been up for 12 consecutive days (new all-time record – all-time is a long time)
- US Stocks have been down for 10 of the last 11 days
- SP500 and Russell2000 draw-downs from the YTD tops in March-April = -6.7% and -8.7%, respectively
Jill (and her Dad) are not happy. And they probably won’t be until their hard earned capital gets back to break-even. That’s another concept that dysfunctional gamblers don’t quite understand until it’s too late either. The market doesn’t owe you a break-even. Mr Macro Market couldn’t care less about what’s in your pocket either.
The US Stock market (SP500) is down -15.4% and -6.7% from its 2007 and 2012 highs, respectively. That doesn’t mean if you’re up +6.7% from here you break-even. It means you have to be up +7.1% from here to get back to your April 2nd2012 break-even, then up another +10.3% from there to get back to your 2007 high-water mark.
This isn’t easy.
Neither is being happy in this business. But your greed can get overbought and your happiness can get oversold, in the meantime.
Immediate-term TRADE oversold lines, across asset classes in our model are as follows:
- SP500 = 1320
- Russell 2000 = 770
- Nikkei = 8709
- Shanghai Composite = 2338
- German DAX = 6341
- Spanish IBEX = 6548
- Gold = $1531
- Oil (Brent) = $109.78
- Copper = $3.44
- Apple = $543
That’s why we bought Apple (AAPL) yesterday. It was immediate-term TRADE oversold right where we bought it at 3:06PM EST. I took our US Equity Asset Allocation up to 12% with that (Cash down to 76%). I’d much rather buy AAPL at immediate-term oversold than buy Tech (XLK) which wasn’t yet signaling the same. Not all happiness gets oversold in the same way, at the same time.
Our immediate-term term support and resistance ranges for Gold, Oil (Brent), US Dollar, and the SP500 are now $1531-1588, $109.78-112.34, $80.48-81.55, and 1320-1351, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer