Dog or Wolf?

This note was originally published at 8am on January 27, 2014 for Hedgeye subscribers.

“The hour between dog and wolf, that is, dusk.”

-Jean Genet


Customer questions on Friday went something like this: ‘Keith, was that a bull or bear? Dog or wolf? What do you think?’ I don’t know. But I’m not in the business of walking up to a bear in the dark without a real-time gun! So let’s stay on our toes here and react accordingly. The best market calls are made by Mr. Macro Market, not me.


Ironically enough, last week I started reading the latest behavioral psych book to bubble up to the top of my pile, The Hour Between Dog and WolfRisk Taking, Gut Feelings and the Biology of Boom and Bust, by former Goldman/Deutsche trader, John Coates.


In his introduction, “it has been said of war that is consists of long stretches of boredom punctuated by brief periods of terror, and much the same can be said of trading” (Coates, pg 5). I’d say that if you were buying-the-damn-bubble #BTDB on Wednesday and Thursday of last week, Friday’s move, punctuated by a +45.8% VIX rip on the week, felt like terror.


Back to the Global Macro Grind


First, instead of screaming bloody murder this morning, let’s contextualize where Friday’s -2.09% drop in the SP500 came from. In an intraday note (11:45 AM on Thursday January 23rd) I wrote a risk management note titled “Not #BTDB Today” and outlined 3 main issues that were signaling in our model:

  1. US Consumption #GrowthSlowing (rate of change vs. Q313’s sequential top)
  2. SP500 broke our immediate-term TRADE line of 1837 support
  3. US stocks making lower-highs (vs. all-time highs) and down YTD perpetuates performance chasing

In other words, this was very much a playbook 3-factor (History, Math, and Behavioral) line of reasoning that seems sound, after the fall:

  1. HISTORY: our Q114 Macro Theme of #InflationAccelerating has historically slowed consumption growth
  2. MATH: immediate-term TRADE signals matter in either confirming existing TRENDs or signaling new ones
  3. BEHAVIORAL: consensus is still in the business of chasing (buying) high and freaking out (selling) low

Got #InflationAccelerating?

  1. The US Dollar (index) was down a full -0.9% last week (down -2.2% now in the last 6 months)
  2. The CRB Index (19 commodities) was +1.5% last week vs the SP500 -2.6%
  3. US Consumer Discretionary Stocks (XLY) are already down -4.98% YTD (vs SPX -3.1%)

And while, Janet Yellen’s new Fed will see no inflation this week (on a lag, after comping the all-time highs in food/commodity inflation of 2011-2012), real-time men and women trying to decide between dog and wolf see breakevens (inflation expectations rising) and Natural Gas +19.8% last week for what it is, on the margin, #inflationary.


Interestingly, but not surprisingly, so does Mr. Macro Market. Remember that down days for US stocks in 2014 have been #timestamped frequently by the following pattern: Down Dollar + Down Rates = Down Stocks.


That’s why the immediate-term TRADE correlations between the US Dollar and the SP500 are as follows:

  1. 15-day = +0.66
  2. 30-day = +0.43

In other words, if economic gravity still matters (it does), and the Dollar and Rates are signaling bear (on the slope of US economic growth), it’s probably a bear.


While everyone in the Barron’s Roundtable said it’s all about the Fed (you have to quantify less in making general groupthink statements), we continue to think that getting market beta right for the last few years has been more about getting the slope (rate of change) of GROWTH and INFLATION right.


On the GROWTH front, this week’s Macro Calendar will show you more #GrowthSlowing (on the margin):

  1. TUESDAY: Durable Goods should slow in December versus November’s +3.4%
  2. THURSDAY: Q413 US GDP should slow to 3-something percent vs Q313’s +4.12% sequential peak
  3. FRIDAY: PMI for January could easily slow form December’s frothy 60.2

Oh, and your illustrious open market committee of forecasting the weather (on a lag) at the Federal Reserve may well taper again on Wednesday into #GrowthSlowing too. Never mind dog or wolf – that’s just dumb.


Our immediate-term Global Macro Risk Ranges are now:


*= new TREND change (in brackets)


*UST 10yr Yield 2.72-2.79% (bearish)

SPX 1779-1825 (bullish)

*Nikkei 14678-15169 (bearish)

*VIX 14.91-20.41 (bullish)

*USD 80.19-80.79 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


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