Stuff Changes

“We are made of the same stuff of which events are made.”

-Ralph Waldo Emerson

 

That’s the opening volley from astrophysicist Eric Chaisson in one of my favorite risk management books, Cosmic Evolution. What’s up with that? What’s up with a chaos theorist prefacing his ideas with the penmanship of a mid-19th century American essayist? It’s all about the storytelling folks. As Taleb recently wrote in Antifragile, “evolution does not depend on narratives, humans do.”

 

While finding the deep simplicity of the Global Macro point that matters can often feel like finding Waldo himself, Chaisson channeling Emerson is consistent with our discipline of Embracing Uncertainty. Emerson was labeled as a “transcendalist” – he preached individualism and self reliance; he did not support dogmatic and/or traditional organizations.

 

We’re human, so we want things about markets to make simple sense within our organizational boxes. But markets change, fast and slow. Sometimes they make sense. Sometimes they don’t.  In the heat of a thermodynamic moment, does every phase change make sense to everyone? Does that change care if you understand it? Of course not. Best we can do is try to keep up.

 

Back to the Global Macro Grind

 

Keeping up with the US stock market hasn’t been easy for the #PTCs (professional top callers). Every time the SP500 sells off to a higher-low (1540 on Friday), they claim victory. Every time we rally off those higher-lows to higher all-time highs, I hear crickets.

 

Crickets? What are crickets? Do you hear them on the floor of the NYSE? Crickets – you can hear the hum when something was supposed to happen, and didn’t. #crickets

 

While I am not entirely sure what kind of a risk management process top-calling is, it fits within the confirmation biases of consensus. My tally is up to 28 high profile PMs, strategists, pundits, etc. who are currently still trying to call the top in US stocks. Maybe this time is different – maybe they’ll all nail it, at the same time. Maybe not.

 

Quantifying sentiment in markets is probably the hardest thing to do – I’ve tested and trialed almost every voodoo signal I have been issued on this front, and I am left with very few that I’d actually act on. Let’s consider those few:

 

1.   Sentiment Spread – the II Bullish/Bearish survey data doesn’t tell me much on most metrics other than its historical spread (ie Bulls minus Bears). This morning, that spread is +2990 basis points wide. Over a decade of my tabulating/monitoring this spread, a relatively safe sell zone is +3 basis points wide. A relatively safe buy zone is basis points wide.

 

2.   Exhaustion (VIX vs SPX) – while plenty will quibble with this for theoretical reasons (“front month doesn’t reflect sentiment” … “term structure matters more”, etc. etc.), for me it’s just a signal that I’ve built for myself that works most of the time. The problem with it is that it’s not signaling all of the time. So I have to wait on it.

 

If you’ve studied thermodynamics, you’ll agree that waiting for a certain amount of entropy matters before you register a certain amount of consequential change (energy). That’s one way to conceptualize my VIX/SPX signal. What I am waiting on is:

 

A)     SPX immediate-term TRADE oversold

B)      VIX immediate-term TRADE overbought

 

Sounds simple, because it is – after you’ve incorporated multiple-factors across multiple-durations in order to contextualize that immediate-term moment. In other words, it’s a lot easier to roll with the conclusion after the process signals it.

 

I’m not submitting that I haven’t been run over by my signals once in a while. Nor am I suggesting that either the Sentiment Spread or the VIX/SPX signal are stand alone silver bullet signals. They are just two of the many tells I use instead of gnomes.

 

Just to roll through putting the aforementioned into action:

  1. On Friday morning, the SP500 was immediate-term TRADE oversold at 1540
  2. On Friday morning, the VIX was immediate-term TRADE overbought at 15.23

So, our #RealTimeAlerts (immediate-term signaling product) acted, aggressively on that, covering shorts and buying stocks (including the SPY itself). This is not about taking victory laps – this is about being accountable to what I do and why. I feel like putting my process out there like this makes it better. Sharp clients question it; so do my analysts internally. In the end, for me at least, that’s a win.

 

The other side of the buy/cover signal is to have the discipline to sell/short on the bounce. We’ve seen that for a few days since the Friday lows, and now, as the SP500 makes another all-time high, we’ll get another SPX overbought/VIX oversold signal too.

 

Will that happen at VIX 12.21 and SPX 1576? I don’t know. And that’s the point. Embracing Uncertainty in a non-linear and dynamic ecosystem like this is what I do. Stuff Changes. So I need to change alongside it.

 

Our immediate-term Risk Ranges for Gold, Oil (Brent), Copper, US Dollar, USD/YEN, UST 10yr Yield, VIX, and the SP500 are now $1, $103.86-107.78, $3.29-3.47, $82.23-83.34, 96.12-100.05, 1.71-1.82%, 12.21-14.51, and 1, respectively.

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Stuff Changes - Chart of the Day

 

Stuff Changes - Virtual Portfolio



Another French Revolution?

"Don't be complacent," writes Hedgeye Managing Director Neil Howe. "Tectonic shifts are underway in France. Is there the prospect of the new Sixth Republic? C'est vraiment possible."

read more

Cartoon of the Day: The Trend is Your Friend

"All of the key trending macro data suggests the U.S. economy is accelerating," Hedgeye CEO Keith McCullough says.

read more

A Sneak Peek At Hedgeye's 2017 GDP Estimates

Here's an inside look at our GDP estimates versus Wall Street consensus.

read more

Cartoon of the Day: Green Thumb

So far, 64 of 498 companies in the S&P 500 have reported aggregate sales and earnings growth of 6.1% and 16.8% respectively.

read more

Europe's Battles Against Apple, Google, Innovation & Jobs

"“I am very concerned the E.U. maintains a battle against the American giants while doing everything possible to sustain so-called national champions," writes economist Daniel Lacalle. "Attacking innovation doesn’t create jobs.”

read more

An Open Letter to Pandora Management...

"Please stop leaking information to the press," writes Hedgeye Internet & Media analyst Hesham Shaaban. "You are getting in your own way, and blowing up your shareholders in the process."

read more

A 'Toxic Cocktail' Brewing for A Best Idea Short

The first quarter earnings pre-announcement today is not the end of the story for Mednax (MD). Rising labor costs and slowing volume is a toxic cocktail...

read more

Energy Stocks: Time to Buy? Here's What You Need to Know

If you're heavily-invested in Energy stocks it's been a heck of a year. Energy is the worst-performing sector in the S&P 500 year-to-date and value investors are now hunting for bargains in the oil patch. Before you buy, here's what you need to know.

read more

McCullough: ‘My 1-Minute Summary of My Institutional Meetings in NYC Yesterday’

What are even some of the smartest investors in the world missing right now?

read more

Cartoon of the Day: Political Portfolio Positioning

Leave your politics out of your portfolio.

read more

Jim Rickards Answers the Hedgeye 21

Bestselling author Jim Rickards says if he could be any animal he’d be a T-Rex. He also loves bonds and hates equities. Check out all of his answers to the Hedgeye 21.

read more