This note was originally published at 8am on May 13, 2014 for Hedgeye subscribers.
“Mister Wabbit, before you die, you can have one wast wish.”
-Elmer Fudd
Was the wast wish to buy in May and pray? They dressed ole Elmer up in a Canadian Mountie uniform for that episode. When the US stock market won’t die, blame a Canadian. Must abandon risk management process and chase the performance wabbit, right?
Uh, no. Stay with what’s been working all year – #InflationAccelerating and slow-growth #YieldChasing assets (like commodities, bonds, and any stock that looks like a bond with low-beta and high-dividend-yield).
And on the short side, take your time and “be vewwy, vewwy quiet…” I’m hunting high-muwtipoh-momentum-bubbo wabbits that have popped back up out of their bombed out holes.
Back to the Global Macro Grind…
“Wisten to the wippling wythm of the woodwinds…” and you’ll hear volume cwickets.
Yesterday’s total US Equity Volume reading was:
- -10% versus the 1 month average
- -31% versus the 3 month average
In other words, other than emotional hedge funds that shorted last week’s lows in almost every oversold momentum short (we sent out cover signals in IWM, ITB, YELP, last week #timestamped) there was no legitimate volume (read: conviction) behind yesterday’s rip.
In fact, going into the open yesterday:
- The net short position in SPX (Index + E-mini) was at a 6 month high of -54,587 contracts
- Three months ago (when you could have bought #MoBro top), the net short position was -30,429 contracts
“So”, many hedge funds were getting squeezed yesterday and those that still believe US GDP growth is going to be +3-4% in 2014 just kept averaging down into growth stocks, I guess.
While CNBC was nailing it with the Dow “at all-time-highs” yesterday, we sent out a short DIA (Dow ETF) signal in #RealTimeAlerts. But that’s not the best short idea we have – it’s waiting on the stocks that have been smoked to pop back up to our signal lines (YELP, TWTR, etc).
Don’t forget that the Nasdaq and Russell 2000 are still -4.9% and -6.2%, respectively, from where your broker could have plugged you buying the all-time-bubble-stock-high in early March. Most of these momentum, social, and housing stocks are still broken.
“Dwat that wabbit”
Yep, both the bond and currency market agree this morning:
- US Dollar Index is nowhere near overcoming its long-term TAIL risk line of $81.17 resistance
- US 10 year Treasury Yield of 2.65% couldn’t care less about people chasing performance wabbits in equities
“So”, if you have to buy something this morning, what do you buy?
- Utilities (XLU +10.3% YTD) have pulled back and are registering another buy signal
- Gold (GLD +7.3% YTD) has pulled back small and is a buy closer to TREND line support of $1271
And, what do you sell?
- Consumer Discretionary (XLY -3.3% YTD) has rallied on no volume to lower highs, so keep selling that
- US Dollar (UUP -0.2% YTD) has rallied sharply off its YTD lows, and remains bearish TREND
Yep, it’s really a macro call. Get the US Dollar and Rates right, and you’ll keep getting your Sector & Style Factors right. If you disagree with our view, you should be buying Dollars and growth stocks and shorting Bonds (like we did at this time last year) in size.
If you ask most consensus economists if they had the process to have you in the opposite this year as you were in last year (from an asset allocation perspective), they might go all-American-excuse-making Elmer on you too… “Yes! I mean NO, that is… I…. er… um…”
Looney Tune Tape, this has become. Chasing performance is not a repeatable risk management process. No worries though, I am sure the cartoon that this has all become will end willy willy well.
UST 10yr yield 2.57-2.67%
SPX 1871-1899
RUT 1094-1144
VIX 12.14-14.52
USD 79.11-80.01
EUR/USD 1.37-1.39
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
