Wind and Rain

This note was originally published at 8am on January 30, 2013 for Hedgeye subscribers.

“Wind extinguishes a candle and energizes fire.”

-Nassim Taleb

 

On my way to Kansas City, Missouri last night I started reading Taleb’s new book, Antifragile. The aforementioned quote is the opening sentence to his prologue. It’s an interesting introduction. He uses a basic contrast of a few elements, and makes up a new word (what he calls the opposite of fragility).

 

While Taleb doesn’t market himself this way, there is a lot of Chaos Theory at the core of his framework. From an economic policy perspective, he is anti-academic dogma, anti-government, etc. “This is the tragedy of modernity: as with neurotically overprotective parents, those trying to help are often hurting us most.” (pg 5) And I’ll obviously second that.

 

Having not read it yet, the questions I have with this highly-promoted book are threefold: 1. Is there anything new here that I can apply to my risk management process? 2. Is it a book for market practitioners or an attempt to become academic in its own right? and 3. Will it help me save and make people money? I’ll review it and let you know.

 

Back to the Global Macro Grind

 

After seeing both the SP500 and Russell2000 close at fresh YTD highs yesterday (all-time high for the Russell) and then seeing China and Japan close at new highs again overnight, the question is: was being long stocks and out of Gold, Bonds, etc. just dumb luck?

 

Well, Nassim says, “I’d rather be dumb and antifragile than extremely smart and fragile, any time.” But I don’t think any man, woman, or child aspires to be dumb, do you? Thinking you are smarter than the Mr. Market – well, that’s an entirely different problem.

 

The most brainless/emotionless risk management exercise I can do to assure myself I am no smarter than anyone else, is shut up and listen to the price/volume/volatility signals in my Global Macro model. Here’s what they are signaling today in the USA:

  1. US Stocks (SP500) immediate-term TRADE overbought in the 1510-1513 range
  2. US Equity Volatility (VIX) immediate-term TRADE oversold in the 11.98-12.04 range
  3. US Dollar Index immediate-term TRADE oversold at $79.41
  4. US Treasury Yields (10yr) immediate-term TRADE overbought at 2.04%

These immediate-term signals are A) contextualized by my intermediate-term TREND and long-term TAIL durations and B) augmented by my research team’s fundamental updates (we have a morning meeting every day at 830AM EST).

 

In Asian Equities, the most important immediate-term TRADE signals this morning are as follows:

  1. CHINA – Shanghai Composite +1% overnight to immediate-term TRADE overbought at 2391
  2. JAPAN – Nikkei225 +2.3% overnight to immediate-term TRADE overbought at 11,124
  3. S.KOREA – KOSPI +0.43% overnight, recaptures TREND support (1959) but remains below 1976 TRADE resistance

In Europe:

  1. EURO – versus the USD, the Euro is immediate-term TRADE overbought at $1.35
  2. GERMANY – the DAX is immediate-term TRADE overbought at 7887
  3. ITALY – the MIB Index (equities) snapped immediate-term TRADE support of 17,714 this morning

All the while, Oil prices are testing an important breakout level of $114.79 (Brent). Wind and fire, meet another element: rain. Oil prices rising from these levels will be a brand new headwind to Global #GrowthStabilizing.

 

So, there’s a lot going on out there – but there always is.

 

Markets don’t care about your positions or processes. That’s why they tend to impose the most amount of pain on most of the people, all at the same time. That’s also why studying the Behavioral side of markets is as important as considering their fractal dimensions.

 

Got pain? Perma stock market bears are going to need a heck of a lot of rain to tone down this bullish bonfire. For 2 months The Pain Trade has been to the upside in stocks (and to the downside in Treasury Bonds).

 

That’s not new. Waking up to snow this morning in Kansas City is new. So I had to A) adapt or B) freeze when I walked over to Sonic to get breakfast.

 

Every day we are offered an opportunity to Embrace Uncertainty and risk adjust our decisions accordingly. If we’re scared of Black Swans and/or uncertain about our process’ ability to absorb uncertainty, I guess Taleb would say we aren’t antifragile.

 

One way to not be emotionally fragile is to keep moving.

 

Now that this morning’s Consensus Signal of The Day pinned a new high (II’s Bull/Bear Spread moves to +3,200 basis points wide to the Bullish Side – it was only 960bps wide in mid-November), you can sell some stocks at our immediate-term TRADE overbought signals. It may not be Taleb’s answer to the game – but for me, it’s just another solid risk adjusted decision to make.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, EUR/USD, USD/YEN, 10yr UST Yield, and the SP500 are now $1649-1676, $112.71-114.79, $3.65-3.72, $79.41-79.98, $1.33-1.35, 89.88-91.66, 1.92-2.04%, and 1492-1513, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Wind and Rain - Chart of the Day

 

Wind and Rain - Virtual Portfolio


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