Fatal Fear

This note was originally published at 8am on October 10, 2013 for Hedgeye subscribers.

“Failure is not fatal, but failure to change might be.”

-John Wooden

 

As I was walking from one client meeting to another yesterday in Boston, I think I changed my US stock market view at least 3 times. Government sponsored volatility does that to a simple “folk” like me. Isn’t it cool?

 

What isn’t cool is not changing your mind. Especially when the causal factor that is driving the market’s immediate-term volatility is either Congress or the Fed, the best plan is usually accepting that the plan is going to change.

 

Does Big Government Intervention in your markets A) shorten economic cycles and B) amplify market volatility? In our Q413 Global Macro Themes call tomorrow at 11AM EST, we’ll show you the trivial data that answers that question. #OldWall media “Fed” story count vs Volatility (VIX) has a positive correlation that will make Bernanke’s “price stability” fans cry.

 

Back to the Global Macro Grind

 

There’s no crying in risk management. So strap it on and keep moving out there. After watching this government gong show and changing my mind throughout the day, I ultimately opted to hit the buy/cover buttons into yesterday’s closing bell.

 

In other words, this is the first morning since Bernanke decided not to taper (September 18th) that I’ll be telling clients to buy-the-damn-dip. Unlike how I used to play this game (emotionally), this is purely a quantitative signal.

 

Other than salvation sent down to us from our overlords from upon high in D.C. (who will be saving us from themselves again), what’s changing this morning?

  1. US DOLLAR Index just v-bottomed off its long-term TAIL line of @Hedgeye $79.21 support
  2. US Equity Volatility (VIX) can easily snap @Hedgeye TREND support of 18.98
  3. US Equities (SP500) can easily recapture 1663 @Hedgeye TREND support of 1663

Yep, that’s about it. That (and US 10yr Treasury Yield holding @Hedgeye TREND support of 2.58%) is just about all this “ordinary folk” needs to see. Fading the false premise of a US “default” just puts a contrarian cherry on top.

 

But what shall I do if consensus sells the open and the VIX holds 18.98?

  1. I’ll sell

Nope, it’s not any more complicated than that. Remember, I’m just a paper trader newsletter guy who has to keep it simple as Zero Edge sells you some fear and Gold ads (gold nailed Fading Fear again btw - ZeroBid).

 

Context is always critical when making both asset allocation and net positioning decisions (I started the week net short). Don’t forget that buying US stocks here comes on the heels of a very basic pattern:

 

1.       Dollar Down

2.       Rates Down

3.       Stocks Down

 

Oh, and volatility (VIX) up +70% from its August low.

 

Government sponsored volatility crushes confidence. US stocks have been down for 11 of the last 15 days on that and the only “UP” days have come on moves like you are seeing this morning:

  1. Dollar Up (+1% in the last 48hrs)
  2. Rates Up (10yr Yield +10bps from the OCT low to 2.69%)
  3. Stocks Up (TBD from the 1-month closing low of 1655 SPY)

Again, “keep it simple stupid.” That’s what my old hockey coach used to tell me when I’d try the howdy doody on a defenseman (I had really bad moves) instead of just driving to the net and firing the puck.

 

“Again!” –Herb Brooks

 

I’m definitely not saying “this is it!” Only people that don’t timestamp would say something ridiculous like that. All I am saying is that after a 4% correction from the all-time US stock market high (1725 SP500), the reward in buying stocks is in its highest probability position (versus the risk) in 3 weeks. SP500 has +23 handles of immediate-term upside to 1679 versus 1651 support.

 

And that’s all I have to say about that.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.61-2.71%

SPX 1651-1679

DAX 8508-8714

VIX 17.65-20.98

USD 79.79-80.81

Gold 1298-1317

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Fatal Fear - Fed vs. VIX

 

Fatal Fear - Virtual Portfolio


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