“The greatest obstacle to pleasure is not pain; it is delusion.”
That’s one of the best quotes from one of my favorite books this year, The Swerve. “Nature ceaselessly experiments… the swerve is the source of free will…” (pg 189). But your boys Bernanke, Boehner, and Obama will have none of that.
Nope. No more nature, gravity, or truth – it’s all about partisan fear-mongering for political gain. And if you don’t like it, too bad – even buying Gold won’t save you now.
The cover of The Economist this week says “No Way to Run A Country”, the US stock market says US Equity Futures down 17 handles this morning, and the bond market? Well, it doesn’t care about this whole “default” thing. Delusion reigns in D.C. instead.
Back to the Global Macro Grind…
This remains the 1st US stock market correction of 2013 that I haven’t been buying on red. Friday was only the 3rd up day for US equities in the last 12 (when Bernanke wrongly decided to Burn The Buck by not tapering).
Down Dollar + Rates Down = US Stocks Down - that’s precisely what you’ll see again this morning. From a US growth expectations perspective, that’s not good.
Some might argue that US futures down 17 is a “capitulation” signal – but context, when considering the emotion of it all, is always critical. At 1671 (my next line of immediate-term TRADE support), this will only be a -3% correction from the SP500’s all-time closing high. That’s hardly a capitulation. That’s a start.
Moreover, it’s important to realize that growth “Style Factors” in our model have barely corrected at all:
- LOW YIELD STOCKS (i.e. growth stocks) are still +32.2% YTD (vs High Yield Stocks +11%)
- TOP 25% EPS GROWTH (by SP500 quartile) = +28.8% YTD
- TOP 25% SALES GROWTH STOCKS = +27.4% YTD
Then you have all the 2013 US Growth Pain Trades:
- HIGH SHORT INTEREST stocks (by SP500 quartile) = +24.9% YTD
- HIGH BETA STOCKS = +25.0% YTD
- SMALL CAPS (Russell2000) = +27.0% YTD
In other words, given Bernanke re-established his Policy To Inflate (via Down Dollar) and D.C. has gone full gong show at the same time, the US #GrowthAccelerating style factor embedded in Friday’s closing prices is almost absurdly high!
Then there’s Institutional Investor sentiment:
- TREASURIES: there’s still a net short position (futures/options data) of -57,902 contracts in 10Y Treasuries
- SP500: there’s a net long position of +10,393 in SPY (vs. the 6mth avg of +6,397)
- II Bull/Bear Survey: ramped +93%! last week (to the bullish side) from the AUG low
That’s right. By my scorecard, US institutional sentiment just got completely whipsawed again. At the late AUG lows, there were only 37% of investors in the Bull/Bear survey who admitted they were “bullish”, then the SP500 proceeded to rip them a +100 handle move to an all-time closing high in SEP. #wonderful
Now, after chasing growth expectations into the SEP highs, Wall Street is caught off-sides again this morning – too long = wrong. So watch the relationship between US Equity performance and US Equity volatility (VIX) from here. I’m already net short in our #RealTimeAlerts signaling product (6 LONGS, 7 SHORTS), but I’d get really net short on a VIX breakout > 18.98.
For front-month fear (VIX), 18.98 is our TREND line of resistance. The corollary to that line = SP500 TREND support of 1660. We haven’t seen either of those lines violated (the wrong way, respectively) since November of last year. And I have no delusions that the #1 risk to growth has always been what’s on your screen this morning – government.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.60-2.68%
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer