Ears Up

This note was originally published at 8am on March 14, 2013 for Hedgeye subscribers.

“You can judge by his eyes and ears. One cannot read bears like that.”

-John Vaillant, The Tiger


Is this a bull or a bear? Whatever it is, and whether you decide to use behavioral ecology, interconnected macro math, or licking your finger, you have to decide on some type of signaling process to answer the question.


Knowing where you are in an economic cycle matters as much as understanding where your predator is (the other side of the trade). That’s why I think Vaillant’s epic true story of a man-eating tiger in Siberia is so relevant to my market day.  


If you see that his ears are down, that’s not a good sign. Then you have to look at him in the eye with all the rage you can muster and the tiger will stop and back off.” (The Tiger, pg 248) When do you think the bulls will back off lifting your offers?


Back to the Global Macro Grind


How are the bears going to stop the US stock market from going up? Since there’s a bull market in top-calling right now, are they going to talk it down? That sounds scary. But does that have any teeth?


You know, the ears are her steering wheel. You can turn off her teeth with the ears” (The Tiger, pg 96).


Admittedly,  that advice comes from a Russian who used to “bag” tigers alive. Reading through Vaillant’s account of encounters with these big cats, I wouldn’t take a stroll into the taiga and try that alone. Neither would I short SPY’s with the VIX signaling 10.


Process Review: there are 2 main parts to how I make risk managed decisions in markets:


1.       Risk Management Signals

2.       Research Views


The Research and Risk Signals aren’t always aligned, but when they are, I move. Instead of the ridiculous “risk on, wax off” thing the sell-side implemented into Old Wall vernacular, let’s think of the market’s main risk (beta) as either having its Ears Up/Down.


Reminder on our current Global Macro Research View:

  1. #StrongDollar Deflates Commodity Inflation
  2. Commodity Deflation Drives real (inflation adjusted) Consumption Growth
  3. Consumption Growth Drives GDP Growth, Gold Down, Treasuries Down, Ears Up

Our updated Risk Management Signals for US #GrowthStabilizing and/or #Accelerating:

  1. US Dollar Index: up for the 6th consecutive week at $82.96 this morning (+4.0% YTD)
  2. CRB Commodities Index: closed down (with stocks up yesterday) at 294 (down -0.3% YTD)
  3. SP500: for the 1st time in 2013, our Risk Range is signaling a higher all-time high (up at 1568)
  4. Russell2000: already made a higher all-time high (yesterday) at 943 (+11.1% YTD)
  5. US Equity Volatility (VIX): closed at 11.83 yesterday (-38% since FEB25); no support to 10.89
  6. US Treasuries (10yr): made another higher-low this wk and is testing 6 month highs today

Then, on the interconnected Global Macro Equity market signaling front:

  1. Japan’s Nikkei = +1.2% overnight, making another new YTD high (+43% since NOV2012)
  2. China’s Shanghai Composite = +0.3%, making another higher-low, holding 2206 TREND support
  3. South Korea’s KOSPI = +0.12% overnight, remains bullish TRADE and TREND in our model
  4. India’s BSE Sensex = +1.1% overnight, back above TREND line support of 19,419 to 19,581
  5. Germany’s DAX = +0.8% this morning, making a run for fresh new highs (Bullish Formation)
  6. Brazil’s Bovespa = -1.4% yesterday, and continues to break down (Bearish Formation, -5.3% YTD)

Only 1 of those 6 Global Equity markets has its Ears Down. That 1 of 6 is not like the others because the Bovespa is a heavily weighted commodity stock market. This is why not everyone agrees with the fulcrum point of our Research View; not everyone gets paid by a Strong Dollar, Down Commodities. Know how people get paid, and you’ll know their confirmation biases.


Ears Down in Oil? Yep. And guess what’s driving that? #StrongDollar. While the immediate-term TRADE correlation between the SP500 and USD  is currently POSITIVE (+0.84), for Brent Oil vs USD it’s NEGATIVE (-0.88). That’s another way to think about signaling without losing yourself in a Ph.D dissertation about causality.


Like a charging bull, bear, or tiger, the Correlation Risk happens fast. And unlike these non-domesticated animals, these mathematical monsters run fast, both ways. So keep those eyes and ears open!


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1568-1591, $108.14-110.28, $82.46-83.11, 94.12-97.29, 1.97-2.11%, 10.89-13.18, 933-954, and 1541-1568, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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