• It's Coming...

    MARKET EDGES

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This note was originally published at 8am on May 18, 2012. INVESTOR and RISK MANAGER SUBSCRIBERS have access to the EARLY LOOK (published by 8am every trading day) and PORTFOLIO IDEAS in real-time.

“I never see what has been done; I only see what remains to be done.”

-Buddha

I’ll have to differ with Buddha on the first part of that thought this morning. I can definitely see what has been done out there. After a -8.1% swan dive in the SP500 (-10.9% in the Russell) and a +71% rip in the VIX since the perma-bull March top, It’s Done.

Done. As in way oversold in the immediate-term done.

Back to the Global Macro Grind

We understand, fundamentally, why Asian, European, and US stocks have been going down since February-March. We understand, mathematically, why Commodity prices (and the Equities that track them) have been annihilated.

  1. #GrowthSlowing
  2. #DeflatingTheInflation
  3. #BernankeBubbles

Instead of banging your head against the wall trying to trade Facebook this morning, call up those hash tags on Twitter, and you’ll see that we’ve been leading on these topics for at least 3 months.

Way too many people confused Ben Bernanke’s January 25thPolicy To Inflate (commodities and stocks) as growth. Short-term pops in asset price inflation is not growth. It’s precisely that food and energy price inflation that perpetuated Growth Slowing.

If you get the Slope of Growth right, you’ll get a lot of other things right. If you get the slope (sequential direction) of both Growth and the US Dollar right, at the same time, you’re done.

Done as in, done selling high – going to Cash, done.

You can have the best bottom-up “ideas” in the world, but when The Correlation Risk goes to 1.0, that’s when almost everything you are long is done too. Done, as in the bad kind of done.

As of last night’s closing prices, here’s the immediate-term TRADE correlation between the big stuff and the US Dollar Index:

  1. SP500 = -0.98
  2. Euro Stoxx600 Index = -0.99
  3. CRB Commodities Index = -0.94

There is no “de-coupling.” There is no risk management in the broken sources who have led you over these cliffs in Q1 2008, 2010, 2011 … and now, again in 2012, either. “Again!” (Herb Brooks)

How many times do we have to allow our profession’s consensus brain-trust miss plainly obvious forecasts of rain while the macro data was soaking wet?

The short answer is that they are done too. The People don’t trust the Old Wall anymore. And they shouldn’t. It’s going to take a long time before we, as a profession, earn The People’s trust (and inflows into Equities) back.

On a cheerier note, this morning I’ll open with our lowest Cash (64%) and highest Equity (36%) positions in the Hedgeye Asset Allocation Model since January (over the course of the Growth Slowing cycle, we’ve moved from 0% US Equities to 24%, and maintained a 0% allocation to Commodities).

To be crystal clear on duration, I’m playing this for the bounce. When markets are viciously oversold like this on our immediate-term TRADE duration, that’s just what we do. It’s no different than when I was shorting the SP500 in March-April at immediate-term TRADE overbought signals. We aren’t perma anything. Risk works both ways. The risk now is to the upside.

Looking at immediate-term ranges in the LONG positions in the Hedgeye Portfolio, here’s where I stand in terms of immediate-term upside/downside in all 14 of our current positions:

  1. SP500 (SPY) = 1303-1344
  2. Consumer Discretionary (XLY) = $42.29-43.74
  3. US Healthcare (XLV) = $36.32-37.07
  4. Apple (AAPL) = $528-560
  5. China (CAF) = $19.41-20.44
  6. Brazil (EWZ) = 50.77-55.34
  7. Melco (MPEL) = 11.84-13.33
  8. Nike (NKE) = $104.14-107.79
  9. Lifepoint (LPNT) = $34.93-36.66
  10. Hologic (HOLX) = 16.81-17.71
  11. HCA Holdgings (HCA) = $25.21-26.19
  12. Urban Outfitters (URBN) = $25.46-27.26
  13. Liz Claiborne (FNP) = 11.78-13.11
  14. Starbucks (SBUX) = 51.63-56.14

It’s Done. I bought a handful of these positions in the last 2-days. #TimeStamped like any position you have taken. I don’t run from them at the lows. I buy them on red. All the while I’m trying to understand each and every factor of each position with my Research Team so that we can handicap the probability of where prices move within our ranges, across durations.

These ranges are immediate-term TRADE durations. From an intermediate-term (TREND) to long-term (TAIL) perspective, our models generate wider ranges of risk.

Generating good “ideas” is what every good research team in this business should be doing – both long and short. But having great performance on those ideas is highly dependent on getting the timing right. You’ll need a repeatable risk management process for that.

Our Research Team, led by our Director of Research, Daryl Jones, has just published their work on Facebook. If you’d like a copy, please email sales@Hedgeye.com. We won’t have a risk managed view of the stock until it opens and starts giving us price, volume, and volatility data.

Our immediate-term support and resistance ranges for Gold, Oil (Brent), US Dollar, EUR/USD, and the SP500 are now $1521-1628, $106.78-111.52, $80.49-81.84, $1.26-1.28, and 1303-1344, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

It's Done - Chart of the Day

It's Done - Virtual Portfolio