This note was originally published at 8am on July 31, 2013 for Hedgeye subscribers.
“Through years of experience I have found that air offers less resistance than dirt.”
I was playing in a golf match at the Newport Country Club in Rhode Island yesterday and, in the final pairing of the day, found myself playing against our all-star Energy analyst (and former Princeton Hockey Captain) Kevin Kaiser.
He hit a tee-shot on a 240 yard par 3 (into the wind on the ocean side of the course) that appeared to have zero resistance until it was in the hole. #Ace
As his playing partner (former NHL’er , Jeff Hamilton) and I walked down the fairway towards the hole, Hammy said “you guys are one-down.” I had zero resistance to that comment too.
Back to the Global Macro Grind…
What if the stock market had zero resistance? That would be cool. I’ve never seen it before, but that doesn’t mean it can’t happen. What is resistance for a market price after it hits an all-time high anyway?
Higher-lows and higher-highs for market prices are bullish. Higher-lows and higher-all-time-highs, are really bullish. And no matter what fairway of life you are walking down into today’s month-end, that’s what the US stock market continues to signal in our model.
Plenty of pundits who were shorting the market since March said you “sell in May and go away.” Then they changed that to June. Now I guess they’ll just have to push that out to August, because here’s what the score card reads on the last day of July:
- SP500 (SPY) = +4.96%
- US Healthcare Stocks (XLV) = +7.12%
- US Financial Stocks (XLF) = +5.32%
In other words, if you weren’t long stocks for all of July, you’ll either need a hole-in-one today, or to just go on CNBC and place your own ball in the hole (after the Herbalife thing, Ackman had to resort to something; pitching a massive long position at month-end).
As stocks continue to make higher-lows and higher-highs, the “value” buyer’s game gets tougher. Combine that perpetual waiting (to buy the dip that doesn’t come) with a massive tail-wind called fund-flows into equities, and playing into that wind gets tougher.
Why does consensus continue to chunk dirt into this epic rally?
- #CYA – lots of people who blew up buying the 2007 top are simply not allowed to buyem this high
- Sentiment continues to be long of fear, when fear itself in Equities (VIX) continues to crash
- The potentially generational fund flow shift out of bonds and into stocks still doesn’t have consensus buy in
If you look at this morning’s II Bull/Bear Spread, it’s more of the same on that front:
- Bulls in the survey dropped back below 50% last week to 48.4%
- People who admitted to still being bearish remained at 19.6%
- The Bull/Bear Spread = +2880 basis points to the bull side
I’m not trying to suggest that after the Russell 2000 and SP500 are up +22.9% and +18.2% YTD that everyone is bearish. I’m not telling you to chase and buy the market on green days either. I’m just reminding you that less than ½ of the players out there are bullish!
And when month-end and YTD performance is in the hole like this, time becomes the bull’s bff…
Let’s go back to the point I made about fear crashing for a minute:
- VIX crashed (again) in July (its -20.6% for the month-to-date)
- VIX is still crashing YTD at -25.6%
- VIX, on a 3yr basis, is -43.0%
That’s a lot of baggage for a dirty ball to carry. And I think, more than anything, else – that’s the point. There’s a lot of mental baggage out there on this course. Consensus bears have been buying 25-30 the thunder and lightning VIX rain protection all year, when it’s been a clear and sunny path toward an implied VIX of 10-12.
Never underestimate the behavioral side to this game. It’s a lot like golf – and, as the great Bobby Jones once said, “Golf is a game that is played on a five-inch course – the distance between your ears.”
Our immediate-term Risk Ranges are now as follows:
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer