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This note was originally published at 8am on January 11, 2013 for Hedgeye subscribers.

“I have a feeling that the bark is worse than its bite.”

-Winston Churchill

That’s what Churchill said about Joseph Stalin in 1944.

For their part, Churchill and Roosevelt never entirely trusted Stalin… they weighed every decision against the possibility that Russia might quit the war, as the Bolsheviks had done in 1917.” (The Last Lion, pg 445).

While I don’t make market calls based on “feeling”, how people feel about markets matters. America’s historical risk management lesson with Russia feels very familiar. Now that the shorts have been squeezed, do I entirely trust being long stocks right now? Of course not.

Back to the Global Macro Grind

The SP500 and Russell2000 finally delivered the Canadian Bacon yesterday, making higher-highs versus their September 2012 and all-time closing highs, respectively.

With the Financials (XLF) leading the charge on the day (+1.3%) and already up +4.6% for the YTD (the SP500 is +3.2%), those who stayed short this market definitely feel more than a little barking out there – these newfound fund flows to equities are like dogs panting.

To review our recent bullish call on Global Equities, there are 3 big parts:

  1. Global #GrowthStabilizing as Hedge Fund Short Interest was rising (NOV-DEC)
  2. Treasury Bonds and Gold breaking down (NOV-JAN)
  3. Fund Flows shifting from bonds to equities (DEC-JAN)

Since Global Macro markets are reflexive, it’s been nice to see these 3 things happen in order:

  1. US Equity Short Interest peaked (sequentially) in the last week of November at 3.98%
  2. Gold stopped going up at another lower all-time high in the 3rd wk of November ($1753)
  3. Global Equity Fund flows just had one of their biggest weeks since 1992 (see Merrill data this morn)

That, of course, is bearish for Treasury Bonds (we are short TLT) – and why we re-shorted Gold (GLD) on green yesterday (see our #RealTimeAlerts product for intraday signaling if you can stand watching me day-trade).

So, with all of this new “news” becoming rear-view mirror events, you don’t want to be getting piggy here; you want to be booking some gains. Depending on how hot these Financials Earnings Reports are for Q412, you can determine how leisurely you can take your time. Wells Fargo (WFC) reports first this morning and the belly of the money-center banks will be out next week.

Why would you make some sales on green?

  1. Global #GrowthStabilizing won’t last forever (remember, Keynesian economic cycles are short and volatile)
  2. #EarningsSlowing will be more readily apparent in late January to early February (Financials as good as it gets)
  3. It’s just generally cool to sell high after you bought low

That last one-liner might annoy some people, but it was pretty annoying seeing people short every up move for the last month as the economic data was improving too.

It’s one thing to be bearish on government; it’s entirely another to be a perma-bear of all things, all of the time.

In an over-supplied industry (asset management), this is why getting the Behavioral side of the market right matters more than it has ever mattered before. Sentiment is a factor that you fade. But it’s also one of the toughest market factors to quantify.

I’m constantly trying to find new channels and data to quantify sentiment. Currently, my Top 3 Sentiment Checks are:

  1. My research team’s proprietary data
  2. My Institutional Client base (our team collaborates best data with theirs)
  3. My Twitter stream

That last one is the one that fascinates me the most. I have built a “contrarian stream” of market pundits that are getting really good at chiming in, almost like an orchestra, on market direction (intraday). They have been trying to sell every down-move to lower-highs since the Fiscal Cliff low of 1400 SPX in the last week of December. #wrong

More on that later. For now, it’s important to realize that Institutional Short Sellers (Short Interest as a % of the total float for stocks listed in the SP500), just dropped from 3.98% in the last week of November to 3.74% into the 1st week of January. At the same time, the Institutional Investor Bull/Bear Spread just went from +950 basis points wide (wk of Nov19) to +2,770 bps wide this week.

Sentiment is a dog to follow, and it bites.

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, and the SP500 are now $1642-1678, $110.33-111.48, $3.64-3.75, $79.48-80.11, $1.30-1.32, $87.41-89.10, 1.86-1.96%, and 1452-1494, respectively.

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

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