“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
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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
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.
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