Panic! Market Up

This note was originally published at 8am on August 19, 2014 for Hedgeye subscribers.

“Panic! Dow Plunges Through Floor”

-1987

 

The 1980s were awesome. From big hair bands to Boesky getting bagged, there was a lot going on. A straight up stock market went straight down. The Dow dropped -22.61% in a day (October 19th, 1987)… but, if you ask the perma bulls, “the market was flat that year.”

 

It’s already August and the Russell 2000 is still trying to get back to flat for the year. With the 10yr Bond Yield having crashed alongside fanciful 1980s like +3-4% US GDP growth expectations, in Greenwich meetings yesterday I was told that GDP “doesn’t matter anymore anyway.”

 

Yep. This time is different. Roger that.

 

Panic! Market Up - Black Monday the Stock Market Crash of 1987 NYT

 

Back to the Global Macro Grind

 

The rate of change in US economic growth may not matter to long-short stock pickers, but it matters, big time, to both the bond market and the sector asset allocations that are driving performance in the US stock market. As growth slows, big-cap-slow-growth #YieldChasing stocks & sectors outperform.

 

They didn’t yesterday though. My Connecticut investor meetings were great, but my recommended positioning sucked:

 

  1. Housing (ITB) led gainers at +2% on the day
  2. Regional Banks (KRE) were right behind the builders at +1.7%

 

The only thing that has sucked more than having that short position yesterday, has been having it as a long position all year.

 

BREAKING:Wall St Rallies on M&A Blitz and Home Builder Data” –Yahoo

 

Yahoooo! Everyone is going to buy everyone as US growth slows. Why not? And I’m not being sarcastic about that either. That said, there’s also a greater chance of Big Alberta Cows jumping over the moon than the US economy accelerating as US Housing and consumption slows.

 

Another US equity only manager told me yesterday that if I was right on #Q3Slowing (and that Janet Yellen gets more dovish, in kind), that “oh, the stock market is going to go higher on that.”

 

In other words:

 

  1. If growth accelerates, as Consensus Macro has been calling for since January, stocks are going to rip
  2. If growth slows, stocks are going to rip too

 

#cool

 

It’s a good thing everyone is going to be a winner under any scenario with Global Macro volatility (across Equities, Currencies,  Commodities, and Fixed income – ping sales@Hedgeye.com for our Q3 Macro Theme of #VolatilityAsymmetry) at all-time lows.

 

That hasn’t happened before, but neither did 1987.

 

Q: How many US equity only PMs live in fear of missing the last 3% of a 5 year rally in the US stock market? A: lots

 

Or at least a lot more than there are PMs, strategists, and (god forbid) economists, who are in print like this Canadian mutt writing about the US economic cycle similarities between Q3 of 2007 and 2014.

 

Enough of the ranting – here are some #timestamped short ideas for this morning’s “futures are up” to sell into:

 

  1. Russell 20000 (IWM)
  2. Housing (ITB)
  3. Toll Brothers (TOL)
  4. Target (TGT)
  5. Brinker (EAT)

 

Yep. On the no-volume bounce (Total US Equity Market Volume was -15% and -39% vs. its 3 month and YTD averages yesterday), I’m going right back to the wood (i.e. the SELL calls that worked for me in both 2007 and 2014). They are early-cycle slowdown housing and consumption shorts.

 

And no, I don’t think that what’s going on in Ferguson, Missouri right now is a bullish catalyst for the 80% of this country being smoked by the all-time highs in Fed-inflated cost of living. Neither would I be surprised if the US stock market had a 3-6% down day in the next 3 months. Then you’ll see panic.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 2.34-2.42

SPX 1950-1977

RUT 1115-1161

MIB Index 18994-20246

VIX 11.14-17.29

USD 81.31-81.72

Gold 1293-1321

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

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