Mercy Calling

“Nothing emboldens sin so much as mercy.”



US stock market bears and Gold bulls alike are begging for mercy this morning, and we will give it to them. I am getting my first coordinated overbought (SP500) and oversold (Gold) signal of 2013. Both signals are explicitly linked to an overbought one in the US Dollar Index. #StrongDollar, on behalf of the 99% of us, we salute you.


The aforementioned quote is one of my favorites in Shakespeare’s Timon of Athens. When I read it in college, I glazed right over it. When I re-read it in William Silber’s Volcker – The Triumph of Persistence, I smiled. I have had 2 feet on the floor, every day, for 5 years competing with sell-side research that doesn’t have the downside I do if I start to get things really wrong. I don’t want mercy.


Volcker believed in mercy – but he also believed free market actors needed to understand and feel pain. After the Policies to Inflate of the 1970s , Volcker reminded Dan Cordtz on ABC in 1980 that “people need to change their expectations and their behavior, and that is always an uncomfortable process.” (Volcker, pg 198). So was being long “inflation” and/or commodities for the next 7-8 years.


Back to the Global Macro Grind


Bernanke, of course, doesn’t have the spine to say anything remotely close to what Volcker did throughout the early 1980s. And the sad reality of our centrally planned market lives (after Bernanke) is that someone like Janet Yellen or Turbo Tax Timmy won’t either.


But, as my man Einstein, would say – everything is relative. And the probabilities continue to mount that both the Japanese and Europeans will be more dovish than anyone at the Fed is allowed to be; particularly when we see a 6% handle on US unemployment.


American confidence in government was so beaten down by Nixon, Carter, and Arthur Burns (the 1970s version of Bernanke), that by the time 1982 rolled around consensus couldn’t believe that #CommodityDeflation served as a tax cut. Growth stabilized and:

  1. Gold kept getting hammered as #GrowthAccelerating became clearer in 1
  2. Oil prices went straight down – the average price per barrel under Reagan = $16.53!
  3. US Dollars ripped the #EOW America camp a new one (average USD Index = $115.25 under Reagan)

No this isn’t an I love Reagan thing. Have mercy on me, please. US politics makes me sick, blah! If the US Dollar Index were to scream +37% to the upside (from today’s price), and Oil were to crash (like down more than 80% from here), would you be happy?


That’s what I am talking about when I say #StrongDollar, Strong America. Russian oligarchs, Middle Eastern Kings, and American Oil/Mining execs might disagree with me on that. Just a bit.


What’s in your wallet? How much Gold are you going to bring to buy beers at tonight’s Bruins game? The shiny metal expectations of a Ben Bernanke to Infinity and Beyond world are fading folks. Gold is crashing (-25% since that epic policy day for Bernanke in September of 2012, when Cramer proclaimed “I love Gold here!”); smoked again this morning, -1.5% to $1372/oz.


Here are my big mercy signals (immediate-term TRADE overbought and oversold) born out of this USD/Gold capitulation:

  1. US Dollar Index = immediate-term TRADE overbought at $84.21 (remains in a Bullish Formation)
  2. Gold = immediate-term TRADE oversold at $1370 (remains in a Bearish Formation)
  3. SP500 = immediate-term TRADE overbought at 1660 (remains in a Bullish Formation)

Overbought and oversold is as prices do. So I could be wrong on this (i.e. early) by 1-2 days or I could be really right. The entire point about my risk management process is making mercy decisions when the pain points to the highest probabilities I can model.


The hardest thing to do in this game is wait on your pitch. I still swing at outside pitches way too often. Whenever I do, it’s either my emotions or our research views that get the best of me. For those mistakes, I have no one to blame but myself.


The easiest thing to do in Global Macro is ride trends. The big moves (particularly at bifurcation points in policy) tend to be more glacial than you see in single stocks. Gold went up for 12 straight years don’t forget. Unwinding #EOW (end of the world trade) will take time.


Process Review - our risk management model is Duration Agnostic. That means we contextualize the short term within the long-term:

  1. TRADE = 3 weeks or less (our immediate-term risk ranges live in this time frame)
  2. TREND = 3 months or more (our best backtests live here – i.e. the calls we tend to get the most right)
  3. TAIL = 3 years or less (usually our best rate of change signal, only when the TREND agrees with it)

So, Bullish Formations are securities that are bullish on all 3 of our core durations (TRADE, TREND, and TAIL) and Bearish Formations are just the mirror opposite of that.


Gold is the mirror opposite of the US Dollar and the SP500 right now. That’s why we are very loud and consistent about our views on all 3 of these big macro moves. Get the US Dollar right, and you tend to get a lot of other big things right.


Getting the mercy pain points right is a very immediate-term risk management exercise. I do all of that timing/probability work underneath the hood myself. I used to tar basement walls for my Dad too. I like getting my hands dirty (if someone pays me to). Mercy Calling is a dirty job, but someone has to do it.


Our immediate-term Risk Ranges for Gold, Oil (Brent), US Dollar, EUR/USD, USD/YEN, UST 10yr Yield, VIX, Russell2000, and the SP500 are now $1, $100.18-103.98, $82.93-84.21, $1.28-1.30, 100.21-103.39, 1.86-1.99%, 12.23-13.87, 971-993, and 1, respectively.


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Mercy Calling - Chart of the Day


Mercy Calling - Virtual Portfolio

Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more