This note was originally published at 8am on October 31, 2012 for Hedgeye subscribers.
“It is not the strongest of the species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.”
Suffice it to say, from a survival perspective, the last 48 hours have been humbling. As my generator teeters on running out of gas again this morning, I write this Early Look to you under a flickering light with a heavy heart.
We will move forward today. We will adapt and change. We will get through this together.
Yes We Will.
Back to the Global Macro Grind…
Today is month-end for October (year-end for many mutual funds). Early morning futures are indicating we’ll get a lift into those month-end markups. Unfortunately, the broader risk management picture of Global Growth and #EarningsSlowing has not yet changed.
From The Bernanke Top (September 14, 2012), US stocks (SP500) and commodities (CRB Index) are down -4.3% and -8.1%, respectively. For October to-date, the SP500 is down -2% and the Tech Sector (XLK) is down -6%.
What will November bring?
I sincerely hope health and safety to the many of us who are in the dark here on the East Coast. But from a stock and commodity market perspective, hope is obviously not a risk management process.
On that score, because I’m really at a loss for words this morning – here are some risk management lines to consider that will be highly influential to US stocks and commodities in the coming weeks:
- US Dollar Index immediate-term TRADE breakout line of $79.57 (long-term TAIL support = $78.11)
- Euro (EUR/USD) long-term TAIL resistance = $1.31
- SP500 TRADE (1431) and TREND (1419) resistance
- Russell2000 TRADE (824) and TREND (846) resistance
- Tech Sector ETF (XLK) TRADE ($29.62) and TREND ($30.28) resistance
- Apple (AAPL) TRADE ($624) and TREND ($640) resistance
- US Equity Volatility (VIX) immediate-term TRADE support = 16.61; TAIL resistance = 19.05
- CRB Commodities Index TRADE (305) and TAIL (312) resistance
- Oil (WTIC) TRADE ($88.32) and TREND ($91.77) resistance
- Gold TRADE ($1735) resistance; TREND ($1699) support
At the same time, it will be important to monitor what the US Bond market thinks about risk. The 10-year US Treasury Yield has been as good a leading indicator as any on US growth in 2012 – here are the levels that matter most in our model:
- UST 10yr TRADE resistance = 1.81%
- UST 10yr TREND support = 1.72%
- UST 10yr TAIL resistance = 1.91%
In other words, if the 10yr yield can’t find a way to breakout > 1.91% in the coming weeks and months, the high probability situation in our model is that US growth will remain below 2% in Q4.
All the while, Chinese demand will be an open question. While our research and risk management views currently say that the “China has bottomed” crowd has no confirming data to support that claim, our views are always subject to real-time change.
Across risk management durations in our model, here are the lines that matter most on the Shanghai Composite:
- Immediate-term TRADE resistance = 2112
- Intermediate-term TREND resistance = 2151
- Long-term TAIL resistance = 2294
When an asset class is bearish across all 3 of our core risk management durations, we call that a Bearish Formation (when last price is above all 3 we call that a Bullish Formation). We don’t have to be bullish or bearish. We simply have to embrace uncertainty, change our minds, and adapt as the data does. That’s how we survive storms.
Our immediate-term risk ranges for Gold, Oil (Brent), US Dollar Index, EUR/USD, 10yr UST Yield, and the SP500 are now $1691-1721, $106.21-109.97, $79.57-80.45, $1.28-1.30, 1.72-1.81%, and 1391-1419, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer