This note was originally published at 8am on August 07, 2013 for Hedgeye subscribers.
“A coach is someone who can give correction without causing resentment.”
I’ve been blessed with great coaches and teachers in my life. They were never easy on me. Their criticisms didn’t cause any resentment either. To the contrary, they drove me to improve. Trusting your coaches is the first step toward opening your mind.
I make a lot of mistakes. And since I’m the front man for this Hedgeye show, that means every mistake I make is front-and-center in the arena of public market debate. That’s not a bad thing. That’s right where I want to be.
What I do isn’t for everyone. I get that. But the first 5 years of building this firm alongside my teammates has given me a keen appreciation for having the opportunity to make mistakes in an open and accountable forum. It speeds my learning process.
Back to the Global Macro Grind…
One of the toughest things to do in US Equities in 2013 has been to coach myself through market corrections. The new normal correction can last anywhere from 4 hours to 4 days. I know, it’s end of the world type stuff. Remember, nothing is normal.
So, from its all-time closing high of 1709 in the SP500 last week, what will the latest US stock market “correction” be?
A) -0.9% to 1693?
B) -1.9% to 1676?
C) -4.6% to 1630?
Yes, that is a Hedgeye Poll. If you have time, ping me with A, B, or C. One of the most important aspects of working in an open/transparent forum of debate is collaboration. I’m pretty sure the days of opaque #OldWall sentiment checks are dead.
Since I actually need to #timestamp an answer to this question, I’ll choose B.
That’s the highest probability choice because the S&P futures already showed me they can snap my mo mo line of 1693 support this morning. And there’s very little fundamental and/or quantitative evidence that 1630 is in play, yet.
What is the “mo mo” line?
That’s the line I use to front-run the machines. It’s home brewed. It’s my most immediate-term risk management duration. It’s especially useful for day-trading, scalping, etc. Label me long-term cycle guy or Mucker, I’m cool with both. Better to scalp, than be scalped.
Put another way, across our core risk management durations:
- SP500 immediate-term mo mo line of support = 1693; and 1714 is resistance (our Daily Risk Range)
- SP500 immediate-term TRADE support = 1676
- SP500 immediate-term TREND support = 1630
The upside down of the is US Equity front-month volatility (VIX):
- VIX mo mo risk range = 11.71-13.72
- VIX immediate-term TRADE resistance = 14.64
- VIX immediate-term TREND resistance = 18.98
In other words, the bullish TREND in US Equities (and bearish TREND in Fear) isn’t in the area code of being challenged, yet. Therefore, if contextualized within the framework of our risk management process, you woke up every morning reminding yourself to not “fight the TREND”, I’d wholeheartedly agree with that. I’d rather fight the Fed than fight things like math and/or gravity.
One of the biggest challenges I have personally is trying to communicate risk management strategies to clients who all have different risk profiles, holding periods, etc. Through consistent feedback and criticism though, I’ve learned that there’s only one answer to this challenge: keep doing what I do - be Duration Agnostic, and keep working on communicating what that process means.
In my humblest of dreams, that would be my happiest retirement: that my teammates and I were successful in not only communicating our multi-factor, multi-duration Global Macro risk management process – but that the players and peers that we coached trusted us.
Trust isn’t allocated. You have to re-learn how to earn it, every day. We have a long road of learning and teaching ahead.
Our immediate-term Risk Ranges are now as follows (*we have 12 Macro Risk Ranges in our Daily Trading Ranges tool now too – as an example, this morning I’ve attached all of them; the bracketed “bullish” or “bearish” comment is on our TREND duration (3 months or more) whereas the range itself is on our most immediate-term duration):
UST 10yr 2.56-2.73% (bullish on yield)
SPX 1676-1714 (bullish)
Nikkei 13489-14137 (bullish)
FTSE 6536-6694 (bullish)
VIX 11.71-13.72 (bearish)
USD 81.49-82.43 (bullish)
Euro 1.31-1.33 (bullish)
Yen 97.01-98.94 (bearish)
Brent 107.23-109.79 (bullish)
NatGas 3.21-3.46 (bearish)
Gold 1274-1317 (bearish)
Copper 3.05-3.18 (bearish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer