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This note was originally published at 8am on January 14, 2014 for Hedgeye subscribers.

“A vigilant and well-informed press, setting forth the truth…”

-Doris Kearns Goodwin, The Bully Pulpit

But what, precisely, is the truth? The truth is that Ray Dalio asks the same question in order to explain his investment process (minus the words ‘but’ and ‘precisely’). It’s the same question you need to be asking yourself every market day.

The 20th President of the United States, James A. Garfield, wasn’t talking about markets when he said that “the truth will set you free, but first it will make you miserable.” But for this morning, let’s lie to ourselves and pretend he did. For me at least, it’s the truth!

The truth is that for the 1st day of 2014, US stocks down (yesterday) has captured the top (most read) headline on Bloomberg.com: “SP500 Falls Most Since November Amid Valuation Concern.” Only one part of that headline story is true. The “valuation” part is just an #OldMedia editorial. Well-informed market practitioners can do better than that.

Back to the Global Macro Grind

Fresh off a feeding of our new born baby Lucy Taylor McCullough yesterday (she’s a beauty!), I walked upstairs to my post and bought-the-damn-bubble #BTDB into the US stock market close. Whether I was right or wrong in doing so isn’t the point. #Timestamps are truth.

Before I get into the why, I’ll just rehash the step by step process in terms of what I actually did:

1. After coming into the open with my first net neutral position of 2014 (8 LONGS, 8 SHORTS), I covered shorts

2. I didn’t cover any of these shorts on “valuation” (RRGB, MCD, LINE, F); I covered them because they were oversold

3. Then I waited, watched, and finally bought SPY on my signal at 3:38PM EST at $181.60

Having made every single mistake you can make in this game in buying things too early (which is typically followed up with excuses like, “but it’s cheap”), this time I actually took my time. Getting net longer on red should be a process, not an emotional episode in your life.

At Hedgeye there are 3 big parts to how we try to probability weight where Mr. Macro Market might move next:

1. History

2. Math

3. Behavioral

On the #history front, contextualizing the emotion of yesterday’s final selling moments is easy – that was only the 3rd one-day decline of over 1% for the SP500 in the last 3 months:

1. November 7th, 2013 = -1.32%

2. January 14th, 2014 = -1.26%

3. December 11th, 2013 = -1.13%

In other words, that’s why the first part of this morning’s Bloomberg headline is true. It was the biggest US stock market down day since November 7th, 2013 when the SP500 closed at 1747. If you bought SPY there, you could have sold it 101 handles higher (+6%) at the US stock market’s all-time closing high of 1848 on December 31, 2012. #truth

#History reminds us that past performance doesn’t predict future results. I have no illusions about that. Neither should you. So let’s dig into some of the math (levels, correlations, etc.) that got me to hit that SPY buy button yesterday:

1. PRICE: the SP500’s immediate-term TRADE oversold line of support = 1817 with TREND support well below that at 1771

2. VOLUME: my composite volume signal was in line with my TREND based average yesterday; nothing to freak out about

3. VOLATILITY: front-month VIX was obviously up on the day, but still well below @Hedgeye TREND resistance of 14.91

So that’s that. The #history and #math parts had nothing to do with “valuation” obviously.

How about the #behavioral side of the decision to buy SPY? I think about that in 2-big parts, levels and catalysts:

1. LEVELS: for a year now, performance chasers have been selling red and buying green; fade that consensus on the signal

2. CATALYSTS: A) Japanese Yen was signaling overbought and B) JPM was signaling immediate-term TRADE oversold

These are, of course, very immediate-term catalysts. But when making buy or sell decisions, what else would you use? Whether people admit it or not, without a tested and tried, real-time, decision making process, they’ll use emotion instead of high probability signal levels and catalysts - or at least I used to.

on A) and B):

A) The Global Macro Correlation Risk that is the YEN vs Nikkei relationship is crystal clear (Yen Down = Nikkei Up)

B) JP Morgan (JPM) beating earnings in this environment (fat Yield Spread) is research edge you either had or did not

On A) the Yen is -0.6% vs USD this morning and on B), thankfully I have a great Financials analyst in Josh Steiner (who has been The Bear on NSM as of late). But even if I didn’t have Steiner, I’d have had that JPM oversold signal alongside the Yen’s overbought one. Now the manic media can run headlines that “JPM Beat, Alleviating Valuation Concerns.”

You either have research and risk management signals that you trust, or you do not. They help keep me well informed.

Our immediate-term Macro Risk Ranges are now:

SPX 1817-1851

Nikkei 15045-15764

VIX 12.08-14.54

USD 80.29-81.35

USD/YEN 103.15-104.61

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

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