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August 18, 2014

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BULLISH TRENDS

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BEARISH TRENDS

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#Behavioral Front-Running

This note was originally published at 8am on August 04, 2014 for Hedgeye subscribers.

“I am trying to understand the origins of every form of front-running in the history of the United States.”

-John Schwall (Flash Boys)

 

John, sorry buds - you’re going to have to look a lot deeper than high-frequency-trading. Front-running proactively predictable #behavior on Wall Street is entirely legal, and it can be quite profitable at that!

 

How do you think about the #behavioral side of this game? Do you spend a lot of time thinking about the other side of your ideas? And/or do you have a process to cleanse the confirmation biases and emotions naturally embedded in your positions?

 

Front-running what my process is going to tell me to do next is a big part of what I do. I guess I can call it front-running myself. #fun

 

Back to the Global Macro Grind

 

After dropping another -2.6% last week, the Russell 2000 is -4.3% for 2014 while one of our favorite ways to be long #Q3Slowing in the USA (long the Long Bond in TLT terms) is +12.8%. It’s definitely a bull market, in long-term Treasury Bonds!

 

But it wasn’t just early-cycle US stocks that got tagged last week – the selling in most things beta was broad based:

  1. Dow Jones Industrial Index -2.8% to -0.5% YTD
  2. Industrials (XLI) were down -3.7% to -0.9% YTD
  3. Consumer Discretionary (XLY) was down another -1.8% to -1.8% YTD
  4. European Stocks (EuroStoxx600) were down -2.9% to +1.1% YTD
  5. German Stocks (DAX) got tagged for a -4.5% loss (-3.6% YTD)
  6. Portuguese Stocks (PSI 20 Index) dropped -10.1% to -11.6% YTD
  7. Commodities (CRB Index) dropped -2.0% on the week to +4.4% YTD
  8. Oil (WTIC and Brent) was down -3.3-4.1% to +3.3% and -2.8% YTD, respectively
  9. Gold corrected -0.8% to +7.4% YTD
  10. Food (CRB Food Index) corrected -1.1% to +18.5% YTD

I’m not going to surprise you this morning in reiterating why I’d be selling early-cycle US Equities and/or European ones. We’ve been making the call on the former for the better part of the year, and on the latter we have been crystal clear on since the beginning of July.

 

Where I might surprise you is in taking down our asset allocation to the Commodities component of our 2014 #InflationAccelerating call. On July 7th, when the Russell 2000 re-tested her all time high (+8% higher at 1208), I had a 24% allocation to Commodities. This morning I have 10%.

 

Why? How about why not? At the beginning of the year it was a contrarian call that even surprised us to the upside. Now, being long commodity inflation is more of a consensus position that is not only correcting, but in some cases breaking my TREND lines on the downside.

 

What hasn’t broken TREND?

  1. Gold’s intermediate-term TREND line of support = $1271, so we’ll stay with that
  2. Cattle and Coffee were up another +0.9-7.4% last week to +29.3% and +64.2% YTD, respectively #StrongSide!
  3. And some of the base metals like Copper and Nickel are still bullish TREND

In other words, it’s not so easy that a monkey can do it (like it was in Q1) just buying anything commodities. You need to get into the price/volume/volatility weeds and start front-running some #divergences within the commodities market.

 

What are #divergences?

 

They’re risk management-speak for the ole Romper Room, “one of these things is not like the other – one of these things just doesn’t belong…” I.e. China! Yes, Chinese stocks not only flashed a bullish #divergence vs. US and European Equities last week, they did again this morning:

  1. Shanghai Composite Index +2.8% last week (and +1.7% this morning) to +8.2% YTD
  2. Hong Kong Stocks (Hang Seng) +1.3% last week (and +0.3% this morning) to +8.7% YTD
  3. Indian Stocks (BSE Sensex) up another +1% this morning to +23.1% YTD

India isn’t China. Silly Mucker. I know (but we still like India too!). That’s why the Hedgeye Asset Allocation model has a higher allocation to International Equities than it does to Commodities today. While it’s weird to be buying Chinese+ Indian stocks and liking Dr. Copper on the long side vs. short the Russell 2000 (after they bounce it), sometimes weird is what works.

 

Another thing to think about in #behavioral front-running terms is that the NET SHORT position in SP500 (SPX + Emini) is back, baby! After tilting to a NET LONG position for the first time since Q1, the CFTC Non-Commercial net short position moved back to -41,210 contracts on Friday.

 

That means hedge funds who covered high on the newsy Q2 GDP report last week, shorted low (again) into the weekend. So SPY (and Russell, IWM) should bounce now. Front-running the #behavior of emotional Consensus Macro hedging has become quite profitable as well.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.43-2.54%

SPX 1921-1962

RUT 1110-1141

Shanghai Comp 2156-2241

USD 80.79-81.69

WTIC Oil 96.99-100.61

Gold 1281-1304

Copper 3.19-3.26

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

#Behavioral Front-Running - Chart of the Day


CHART OF THE DAY: Highest Cash Position in 24 Months

CHART OF THE DAY: Highest Cash Position in 24 Months - Chart of the Day


At 52% Cash in the Hedgeye Asset Allocation model this morning, that’s the highest Cash position we have had in at least 2 years. 


Daily Trading Ranges

20 Proprietary Risk Ranges

Daily Trading Ranges is designed to help you understand where you’re buying and selling within the risk range and help you make better sales at the top end of the range and purchases at the low end.

TV Markets

“They got their politics on TV and were not persuaded by policy descriptions or rational arguments.”

-George Packer

 

I showered, shaved, and slapped on a suit to do Fox News in NYC yesterday (yep, just what I wanted to do on a summer Sunday). On my way out, my son Jack was riding his bike in the driveway and said to me “Dad, good luck.” I thought to myself, man isn’t this country going to need it.

 

The aforementioned quote comes from a book I’m reading right now that I highly recommend: The UnwindingAn Inner History of The New America. It cuts through many of the threads I’ve been trying to weave in 2014 (history, behavioral, demographics).

 

From Jay Z to Newt to Oprah and Sam Walton, this collection of histories contextualizes why so much of what this country has become is made for TV. Sound bites, quick fixes and bling. “Yes We…” … uh… maybe No We Can’t, from here…

 

TV Markets - f3

 

Back to the Global Macro Grind

 

No we can’t get back to 3-4% US GDP growth. Not this year. And probably not next year either. Never mind what you hear on TV. The real US economy is slowing in Q3. The bond market reiterated that last week, big time.

 

The 10 yr US Treasury Yield dropped another -7 basis points last week to 2.34%. In case you are keeping context’s score, that’s:

 

  1. A fresh YTD low for the leading indicator for the rate of change in US growth
  2. Down -23% (69 basis points) from where the 10yr started 2014 (3.03%)
  3. And isn’t in the area code of Consensus Macro’s 3.25-3.5% “forecast” for the 10yr in 2014

 

Alongside falling bond yields and the Russell 2000 (a proxy for US growth expectations) being -1.9% YTD what’s interesting now is that some of the more cyclically sensitive (read: LATE CYCLE) stuff like inflation and employment growth is starting to wane:

 

  1. CRB Commodities Index was down another -0.9% last week to +3.5% YTD and is now bearish TREND @Hedgeye
  2. CRB Food Index was flat last week (still +17% YTD) and is now bearish TRADE (losing momentum) within a bullish TREND
  3. Oil prices continued to fall last week (Brent -2%) and remain a bearish intermediate-term TREND @Hedgeye

 

Let me write that one more time – inflation and employment gains are late, not early, cycle indicators. “So”, as both the European and US economies slow in Q3 of 2014, why can’t we see both inflation and employment rates of change deteriorate from their 1H 2014 peaks?

 

One way to play this from a US stock market investors perspective is:

 

  1. Rotating out of Energy (XLE) stocks (which led losers last week at -0.2%)
  2. Rotating into more Healthcare (XLV) exposure (which led gainers at +2.4% last wk)

 

That’s a later cycle portfolio move than the early cycle ones we have been signaling since the beginning of the year (which we’d stay with and include):

 

  1. Short Housing (ITB)
  2. Short Consumer Discretionary (XLY)
  3. Short Regional Banks (KRE)

 

Getting out of late-cycle commodity inflation is also very defensive in the sense that you can’t be as “invested” as we thought you should be in #inflationAccelerating for the first 6 months of the year. You won’t hear this on TV either, but in risk management speak that means RAISE CASH.

 

At 52% Cash in the Hedgeye Asset Allocation model this morning, that’s the highest Cash position we have had in at least 2 years. On the 48% “invested”, my Top 3 positions (rank ordered in terms of size) would be:

 

  1. Long the Long Bond (TLT)
  2. Long Emerging Market Equities (India, China, Indonesia)
  3. Long Gold (GLD)

 

In other words, if I was running my old hedge fund, I’d still be running net long Bonds and International Equities in Global Macro, but scaling into net short positions in both US growth and European Equities.

 

While we haven’t re-signaled the short calls in places like Portugal (PGAL), Italy (EWI), or the SP500 (SPY) yet, the best way to see me do that in real-time is in our Real-Time Alerts product. From a short seller’s perspective, you won’t get that trying to learn market timing on TV either.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.34-2.43%

SPX 1

RUT 1115-1151

BSE Sensex 251

VIX 11.84-14.92

WTIC Oil 95.41-98.46

Gold 1

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

TV Markets - Chart of the Day


The Week Ahead

The Economic Data calendar for the week of the 18th of August through the 22nd of August is full of critical releases and events.  Attached below is a snapshot of some of the headline numbers that we will be focused on.

 

The Week Ahead - 08.15.14 Week Ahead

 


Commodities: Weekly Quant

Commodities: Weekly Quant - Chart1 Divergences

Commodities: Weekly Quant - Chart2 wow delta

Commodities: Weekly Quant - chart3 USD Correls

Commodities: Weekly Quant - chart4 S P Correls

Commodities: Weekly Quant - chart5 volume metrics

Commodities: Weekly Quant - chart6 volatility metrics

Commodities: Weekly Quant - chart 7 cftc sentiment

Commodities: Weekly Quant - chart8 1 mth correls

Commodities: Weekly Quant - chart9 3 mth correls

Commodities: Weekly Quant - chart10 6 mth correls

Commodities: Weekly Quant - chart11 1 yr correls

Commodities: Weekly Quant - chart12 3 yr correls


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