This note was originally published at 8am on November 14, 2012 for Hedgeye subscribers.
“The only thing that makes sense is to strive for greater collective enlightenment.”
I was on a plane to Austin, Texas yesterday, grinding through my reading pile, and came across that excellent thought leadership quote in Businessweek from the Founder/CEO of Pay Pal and current Chairman of Tesla, Space X, etc. – Elon Musk.
Then I came across another quote from Amazon’s Founder/CEO, Jeff Bezos: “We don’t want to do me-too things. The people we’ve attracted over time to Amazon want to be pioneers. They want to be inventors. They want to do new things.” (All Things Digital)
And I couldn’t help but do what I should probably do every day in this business – stop everything I am doing that has to do with regressive broken sources and just think about more and more ways to collaborate, innovate, and create. That’s progress.
Back to the Global Macro Grind…
What was not progressive was seeing so many people get sucked into buying September’s top. While I am fine with sending you “Buy The Flush Notes” as our long-term TAIL line of 1364 SP500 support holds, I am far from fine with where the bull case goes from here.
It’s not like the risk management signals in September/October haven’t been obvious. Seasoned veterans of going to cash like Baupost’s Seth Klarman (went to 33.5% cash at the time of his note) wrote as recently as October 23rd in his client letter:
“The overall market environment seems increasingly risk to us… US corporate earnings are expected to be lower this quarter. Higher markets in the face of eroding fundamentals can be a toxic combination.”
Obvious is as obvious does, in hindsight.
US Corporate Margins coming off an all-time peak and Bernanke’s Bubbles (commodities) popping are long-term cycle risks. Going off (or saving us from) the #KeynesianCliff that politicians perpetuated in the first place won’t change that.
So where do we go from here? I don’t know. All I know is that we are observing a non-linear and dynamic market ecosystem that gives us an opportunity to change our mind about that, daily.
In the meantime, conditional probabilities give us clues. If, if, then. If a market is bearish TRADE, TREND, and TAIL, then don’t buy it. If a market is bearish TRADE and TREND, but bullish TAIL, then you don’t play hero – you take your time.
With that decision making process in mind, here are some US centric risk management signals to consider, across our core durations (TRADE, TREND, and TAIL):
- SP500 = down -6.2% from the Bernanke Top is bearish TRADE and TREND (1419) with long-term TAIL support of 1364
- Russell2000 = down -8.8% from the Bernanke Top bearish TRADE, TREND (846) and TAIL (797)
- Nasdaq = bearish TRADE, TREND (3069), and TAIL (2937)
- Financials (XLF) = bearish TRADE and TREND ($15.58); bullish TAIL ($14.93)
- CRB Commodities Index = bearish TRADE, TREND (305), and TAIL (312)
- Oil (WTIC) = bearish TRADE, TREND ($88.35), and TAIL ($92.86)
- Gold = bearish TRADE (1748); bullish TREND (1704)
- Copper = bearish TRADE, TREND (3.61), and TAIL (3.91)
- US Equity Volatility (VIX) = bullish TRADE and TREND (16.02); bearish TAIL (19.58)
- US 10yr Treasury Yield = bearish TRADE, TREND (1.72%), and TAIL (1.91%)
Global markets reflect our Collective Enlightenment. It will be a great day in this business when best in class risk management and research processes do too.
Our immediate-term risk ranges for Gold, Brent (Oil), US Dollar, EUR/USD, UST 10yr Yield, Copper, and the SP500 are now $1704-1748, $105.02-109.41, $80.56-81.34, $1.26-1.28, 1.56-1.69%, $3.41-3.51, and 1364-1397, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer