“Boom, crush. Night, losers. Winning, duh.”
Yesterday was one of those days that people absolutely loved or hated. Watching my Twitter #ContraStream was quite comical actually. Some of the “intellectual” types just couldn’t believe what was happening. Some of the bros were tweet-panting.
I think most of you know that I’m not the smartest player in this game. I think that helps me. I think less when I change my mind and/or position. That’s by design. After making almost every mistake you can make in this game with live ammo (multiple times), I’ve built in blinders (machines) for my emotions. They stop me from over-thinking.
To each their own. Like you, I have my style biases. One of the big ones is approaching this game of globally interconnected-risk from an athlete’s perspective. I know we can’t win unless I grind alongside my teammates. I also know we’ll lose if we don’t respect Mr. Market’s signals.
Back to the Global Macro Grind…
VIX snaps @Hedgeye TREND support of 18.98; SP500 rips through 1663 @Hedgeye TREND resistance. “#Boom, Crush!” The Signal within the manic media’s noise made it so simple that even a hockey player could do it.
And what did we learn?
- Respect the setup (the signal was screaming into event risk that government could save us from themselves)
- Stay with the confirmation (the signal said stay with the early part of the move; don’t sell)
- Let it ride (9 LONGS, 3 SHORTS @Hedgeye – with 2 of the 3 SHORTS being bond shorts)
Do you know how many times in the last 15 years that I have violated not one, but all 3, parts of that risk management process? I don’t. And that’s primarily because 5 and 10 years ago, I didn’t have this dynamic signaling model. It evolves.
What you’ll quickly note in steps 1-3 of the decision making tree is that there are no points for intellectual IQ. Mr. Market doesn’t care how smart you are. He couldn’t care less what your position is either. The only thing that matters is how well you listen to him.
For me at least, just getting to step 1 was tough – and that’s primarily because I think the Fed leaning on the long-end of the curve, suppressing rates, and devaluing the Dollar, is a textbook #GrowthSlowing signal. But that fundamental signal should never be confused with a quantitative risk management signal. In the immediate-term they can be 2 very different things.
Once I accepted the VIX/SPY signal for what it was, what did I do next?
- Stayed with the confirmation – that means I got longer on green (covered a short, bought a long)
- Then I let it ride throughout the day despite every bone in my body telling me to sell
What do my bones have to do with it? Listen to them and prepare to be crushed. “Night, losers.” Letting a winning move ride is easily the hardest thing for me to do. Why? Because I love booking gains. And for that very reason, I tend to book them too early.
So, I need to be better than that and let the signal tell me when/where it’s the right time to sell. I’m nowhere near as bad as I used to be on this front. But I have a lot of room to improve.
Let’s use SP500 levels as an example of why I’d let that ride yesterday and drop our Cash position to 42% (we started the week net short in #RealTimeAlerts and had a 55% Cash position in the Hedgeye Asset Allocation model):
- SP500 intermediate-term TREND resistance became support at 1663; that’s a big line
- SP500 immediate-term TRADE breakout line = 1681; layered on top of the TREND, that’s even bigger
- SP500 immediate-term TRADE resistance = 1708; that’s up another +0.9% from the 1692 close
All the while, I’m considering the emotion and intensity of the move (this is where the Twitter #Contra-Stream I built is priceless) within the context of the prior 2013 US stock market “corrections.”
As you can see from Darius Dale’s Chart of The Day, each of the last 3 corrections has:
A) been to higher-lows
B) been less of a % move than the prior correction
C) been on less volume than the prior correction
Markets that people hate are the best ones to be long; particularly when corrections are confirmed by weak volume and lower-high volatility signals. Again, to contextualize this recent SP500 correction:
- SEP 18 to OCT 8 correction = -4.1%
- AUG 2 to AUG 27 correction = -4.6%
- MAY 21 to JUN 24 correction = -5.8%
And I get it. For the last 3 weeks I wrote to you every day that I wasn’t buying this correction like I did the AUG and JUN corrections. But I also get when and why I changed my mind. There are no rules against doing that. “Winning, duh!”
Our immediate-term Risk Ranges are now:
UST 10yr 2.65-2.71%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer
TODAY’S S&P 500 SET-UP – October 11, 2013
As we look at today's setup for the S&P 500, the range is 26 points or 0.62% downside to 1682 and 0.91% upside to 1708.
CREDIT/ECONOMIC MARKET LOOK:
- YIELD CURVE: 2.34 from 2.34
- VIX closed at 16.48 1 day percent change of -15.92%
MACRO DATA POINTS (Bloomberg Estimates):
- 9:55am: U Mich. Confidence, Oct. prelim, est. 75.9 (pr 77.5)
- 11am: Fed’s Powell speaks on monetary policy in Washington
- 11am: Fed to purchase $1.25b-$1.75b in 2036-2043 sector
- 1pm: Fed’s Rosengren at Council of Foreign Relations in N.Y.
- 1pm: Baker Hughes rig count
- 9am: Natural Resources Defense Council, Sierra Club, Canadian scientists and activists briefing on Canadian govt, climate policies, tar sands expansion, Keystone XL
- 10am: Joint Economic Cmte hearing on fiscal sustainability, economic growth
- 1:30pm: G-20 members hold IMF/World Bank press conferences
WHAT TO WATCH:
- House Republicans enter talks with Obama on debt-ceiling deal
- Default doubters repudiated by Republican economists citing harm
- Energy Future said near bankruptcy loan exceeding $3b
- Pimco said to raise $3.5b for Bravo II credit fund
- Del Monte Pacific to buy U.S. food brands for $1.68b
- Twitter said to pay 3.25% bankers’ fee in IPO topping $1b
- Potash Corp. cuts profit forecast amid market uncertainty
- Device sales delays possible as shutdown halts FCC reviews
- Brevan Howard said to start fund run by ex-Deutsche Bank team
- China Greenland to invest in $5b New York property deal
- Google moved EU8.8b in royalty payments to Bermuda in 2012: FT
- ESM’s Regling says Greece widely expected to need new bailout
- Royal Mail surges on opening following oversubscribed IPO
- U.S. Debt Deadline, China GDP, Google, GE: Wk Ahead Oct. 12-19
- JPMorgan Chase (JPM) 7am, $1.29 - Preview
- Webster Financial (WBS) 8am, $0.49
- Wells Fargo (WFC) 8am, $0.97 - Preview
COMMODITY/GROWTH EXPECTATION (HEADLINES FROM BLOOMBERG)
- Corn Tumbles to Three-Year Low on U.S. Harvest, Ethanol Mandate
- Gold Analysts Bearish on Signs of U.S. Compromise: Commodities
- IEA Sees Oil Output From Outside OPEC Rising Most Since 1970s
- Cocoa Jumps to Highest in Almost Two Years as Supply Falls Short
- Copper Rises for Second Day on Strengthening Chinese Car Sales
- WTI Crude Set for Weekly Decline; IEA Sees Non-OPEC Supply Boom
- Gold Heads for Second Weekly Loss as U.S. Impasse Seen Ending
- Rebar Gains for Second Week on China Restocking, Iron Ore Prices
- Falling Copper Grades Show Super Cycle Intact: Chart of the Day
- Coal 4-Year Low Lures Utilities Ignoring Climate: Energy Markets
- U.S. Oil Boom Races Against Red Queen as Shale Wells Fade Fast
- Shale Ascendancy in Europe Displaces Pipeline Gas: Bear Case
- Lukashenko Calls for Potash ‘Cartel’ Revival to Boost Price
- Sugar Climbs in New York as Brazil May Slow Sales for Now
The Hedgeye Macro Team
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Please join us for a flash call titled “Dismantling Darden” tomorrow, October 11th at 12:00pm EDT. On the call we will discuss the opportunities we see to significantly increase shareholder value at Darden. We have pursued this topic extensively and put together a 30 page Black Book, highlighting Darden’s inefficiencies and our vision for a potential turnaround.
TOPICS OF DISCUSSION INCLUDE:
- Reshaping the enterprise
- Operating trends among the worst in the casual dining industry
- Darden’s bloated cost structure
- Sum of the parts valuation
- What are the implications of the Barington Capital news and what is next for the company?
- Toll Free Number:
- Direct Dial Number:
- Conference Code: 493295#
- Materials: CLICK HERE (Will download one hour prior to the call)
If you have any questions, please email or call.
Takeaway: Despite the headline increase, today's claims data is very strong. Given the dearth of fundamental data, stick with the price signal here.
STICK WITH THE SIGNAL
Policy issues have dominated headlines and driven most of the equity and fixed income market price action over the last few weeks.
The private sector data we have received for September has been largely equivocal with ISM Mfg and Consumer Credit marginally higher sequentially, Mortgage Applications and Small Business/Consumer confidence flat, and ISM services and Vehicle sales down marginally.
The labor market strength, however, has not been equivocal. Inclusive of today’s jump in Initial claims (which is still positive after adjusting for the CA computer system and government shutdown impacts) the trend in the labor market remains decidedly positive. More detail on this week's claims data below.
From an Investment Management perspective, with the bulk of federal government sourced data releases embargoed or unavailable (ie. a dearth of fundamental data), our Prices Rule Risk Management model becomes an increasingly important signaling mechanism for driving portfolio decisions.
So what are the key metrics and levels that matter right here? The Dollar, VIX, and S&P500.
To reiterate the key levels of focus Keith highlighted in this morning’s Early Look.
- U.S. Dollar: The $USD long-term TAIL line of support = $79.21
- VIX: VIX TREND Support sits at $18.98
- S&P500: SPX TREND Resistance sits at $1663
In short, with the USD holding above its TAIL line, if the VIX can breach $18.98 on the downside and the SPX can hold 1663, the risk-reward to being long shifts positive and we cover more shorts and play for the 23 handles of immediate term upside in equities. If the VIX and SPX fail to breach & hold their respective levels, we continue to keep gross exposure relatively low, net exposure tight and sit on our hands a bit longer.
Dollar Up + Rates Up + Stocks Up remains the constellation of price factors we want to see persist to remain constructive beyond the positive, immediate term TRADE setup.
Below is the breakdown of this morning's claims data, along with some Financial sector specific takeaways, from the Hedgeye Financials team. If you would like to setup a call with Josh or Jonathan or trial their research, please contact
- Hedgeye Macro
INITIAL CLAIMS: Not So Fast
We've been singing the praises of the initial jobless claims data for a while now, particularly as it showed noted divergence vs some of the other labor market data series. This morning we found out that at least a portion of the recent strength (since the start of September) was attributable to shenanigans in California new software for processing claims. For the last 4 weeks, since roughly the start of September, California has had a backlog of claims due to difficulties arising from their new software system. This past week, they finally got the bugs out of it and caught up. The effect was an increase of ~33k SA jobless claims. Total SA claims rose by 66k this week, and half that was attributable to CA, said a Labor Dept spokesperson. Beyond this, there was a further 15k increase this week from defense companies laying people off temporarily due to the government shutdown.
What we've done in the chart below is reconstruct the last five weeks of data to reflect CA's issues and the 15k temp layoffs from defense. The takeaway is that the trend is intact. Rolling NSA claims, adjusted for these issues, was lower by 14.1% in the latest week, which is almost right in line with the trendline since the start of the year, and only nominally weaker than the best print we've seen YTD of -14.9% 3 weeks ago.
The bottom line is that this morning's data looks terrible, but the underlying trends in the labor market remain exceptionally strong. We would reiterate our bullish stance on being levered to the ongoing jobs recovery. This morning we flagged Capital One (COF) in a note as being a great way to play this theme.
Nuts & Bolts
As there was no revision to the prior week's data, SA initial jobless claims rose 66k to 374k from 308k WoW. Meanwhile, the 4-week rolling average of seasonally-adjusted claims rose 20k WoW to 325k.
The 4-week rolling average of NSA claims, which we consider a more accurate representation of the underlying labor market trend, was -11.7% lower YoY, which is a sequential deterioration versus the previous week's YoY change of -18.2%, but this reflects the impact of the CA distortion.
Joshua Steiner, CFA
Jonathan Casteleyn, CFA, CMT
Risk Managed Long Term Investing for Pros
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