CHART OF THE DAY: Small Cap Liquidity Trap | $IWM

"If PRICE is rising with decelerating VOLUME and trending VOLATILITY is rising, that is called a Liquidity Trap," CEO Keith McCullough wrote in today's Morning Newsletter. "Those are not what you want to be buying at the high end of the risk range. You should consider them wonderful selling opportunities."

CHART OF THE DAY: Small Cap Liquidity Trap | $IWM - 11.11.14 Chart

The Battlefield's Vortex

“Where is the battlefield? The answer would be, everywhere.”

-Colonel Qiao Liang


That was a quote from the People’s Liberation Army in China in 1999 that Jim Rickards cited at the beginning of a chapter titled The War God’s Face (The Death of Money, pg 42).


Since today is one of the most important days of the year to show our gratitude and respect (Veterans Day in the US, Remembrance Day in Canada, Armistice Day across Europe), I’d like to take a minute to do that this morning.


While the battlefield of economic and market risks continue to mount, we should never forget the sacred one where our bravest countrymen have fought for our liberty and freedom.


The Battlefield's Vortex - v4


Back to the Global Macro Grind


In the last few weeks I have been meeting with Institutional Investors in New York, Boston, Los Angeles, San Francisco, and Chicago. I need to get out of the Windy City this morning before this polar vortex thing rolls in!


The definition of a vortex: “a mass of whirling fluid or air.” That sounds like the feedback I’ve been getting on the bull case for US and global growth – oh, and the “it’s different this time” short covering we have seen in the US stock market in the last month.


But what happens after the vortex? Will there be massive volume buying at the all-time #bubble highs again, or not? How can we measure and monitor that? And what if all that comes after the v-bottom-vortex is crickets?


Crickets in the snow?


Yep. Anything can happen! Today the bond market is closed, so you’ll definitely hear crickets there. But you could also hear them in yesterday’s US stock market trading too. Here’s what happened in terms of Total Equity Market Volume (including dark pool):


  1. Volume was down -8% versus its 1-month average volume
  2. Volume was down -25% versus its YTD average volume


This is almost exactly what happened at the end of September (before the -10% drop in the SP500) when I’d write to you about explicit risk signals like decelerating-volume-on-up-days, and how big domestic #GrowthSlowing signals (like the Russell 2000 and UST 10yr Yields making lower-highs) were confirming that an immediate-term topping process was in motion.


While many still use point-and-click simple (one factor) moving averages to calibrate what they think is market risk (it’s above the 50-day bro, chart looks sweet!), the core Hedgeye quantitative signal has not changed – it has 3-factors:


  1. PRICE


The reason why we consider the battlefield of risk this way is that this is where you can find the market’s internal convictions. If PRICE and VOLUME are accelerating as trending VOLATILITY is falling (like it did in 2013), I’d be all bulled up on small cap growth.


However, if PRICE is rising with decelerating VOLUME and trending VOLATILITY is rising, that is called a Liquidity Trap. Those are not what you want to be buying at the high end of the risk range. You should consider them wonderful selling opportunities.


Again, we don’t want you shorting what almost every hedge fund on the planet is using as their perceived “hedge” (the SP500). We want you to short the Russell (IWM), and buy the Long Bond (TLT) on the other side of it.


Price, Volume, and Volatility provide a quantitative overlay to our fundamental research process. If there’s one fundamental factor that has mattered most in my investor debates, it’s the same one that has mattered all year – growth.


After 65 consecutive months of a US economic expansion, is the rate of change in US growth accelerating or slowing? That’s the battlefield debate – and, if you’re in our camp, there are plenty of ways to express our US #GrowthSlowing view:


  1. LONG: Healthcare stocks (XLV) led yesterday’s rally, +1% on the day, to +22.3% YTD
  2. SHORT: Consumer Discretionary (XLY) and Energy (XLE) stocks (which were both down, again, yesterday)


That’s right. While everybody and their thesis-drifting-brother on the Old Wall is now parroting that “you buy Consumer Discretionary stocks because of down oil prices”, that’s been one of the worst sectors of the market to be long in the last week.


Not only was it down with Energy deflating yesterday, Consumer Discretionary (XLY) was down on the week last week too. “So”, what does that tell you about late-cycle indicators like employment (and the lack of wage growth)?


Prepare for slowing’s vortex. Winter is coming.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.25-2.40%


RUT 1135-1182

Yen 111.99-117.87

WTI Oil 75.69-79.16

Gold 1121-1201


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


The Battlefield's Vortex - 11.11.14 Chart

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November 11, 2014

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TODAY’S S&P 500 SET-UP – November 11, 2014

As we look at today's setup for the S&P 500, the range is 87 points or 3.69% downside to 1963 and 0.58% upside to 2050.                                                    













  • YIELD CURVE: 1.83 from 1.83
  • VIX closed at 12.67 1 day percent change of -3.43%


MACRO DATA POINTS (Bloomberg Estimates):

  • Bond markets closed for Veterans Day
  • 7:30am: NFIB Small Business Optimism, Oct., est. 96 (pr 95.3)
  • 7:45am: ICSC weekly sales
  • 8:55am: Redbook weekly sales



    • House, Senate not in session
    • Govt. offices closed for Veterans Day
    • Political directors from China, France, Germany, Russia, U.K., U.S. meet with Iran in Muscat, Oman
    • Sec. of State John Kerry accompanies Obama in Beijing



  • Banks Said Poised to Settle With CFTC in Currency-Rigging Cases
  • Barclays, HSBC Sued by U.S. Soldiers Over Attacks in Iraq
  • Takata Accused in Suit of Burying Results of Bad Air-Bag Tests
  • Juniper CEO Resigns After Board Review Over Customer Negotiation
  • Mondelez to Buy Stake in Kinh Do Snack Unit for $370 Million
  • U.S. Says Breakthrough Reached With China on Trade Accord
  • Alibaba Open to Working With PayPal to Expand Payments Business
  • American Apparel Posts Biggest Quarterly Sales Drop Since 2010
  • Hortonworks Planning Stock Sale Touts $50 Billion Hadoop Market
  • Mersch Says ECB Ready to Expand Asset Purchases to ABS Next Week
  • Shanghai Stock Trading Surges to Record Before Exchange Link
  • Google to Lease NASA’s Moffett Field Airfield for $1.2 Billion
  • Clear Channel Said to Consider Europe Outdoor Unit Ad Sale: Rtrs
  • SpaceX to Make Micro-Satellites Announcement in 2-3 Mos: Musk
  • GM Ignition Defect Tied to Death of Woman 11 Years Ago: NYT



    • Aecom Technology (ACM) 7am, $0.82
    • CST Brands (CST) 7am, $0.58
    • DR Horton (DHI) 7am, $0.48 - Preview
    • Fossil (FOSL) 4:01pm, $1.82 - Preview
    • Insys Therapeutics (INSY) 7am, $0.26
    • Sabre (SABR) 8am, $0.25
    • Semafo (SMF CN) 8am, $0.06
    • Tahoe Resources (THO CN) 4:02pm, $0.25
    • YY (YY) 4:01pm, $0.74



  • Get Ready for $60 Iron Ore as Citi Says Slump Has Long Way to Go
  • Brent Crude Falls to Four-Year Low as WTI Slides on Stockpiles
  • Gold Falls a 9th Time in 10 Days as Stronger Dollar Cuts Demand
  • Aluminum to Copper Slide as Strengthening Dollar Erodes Demand
  • Palm Imports by India Seen Rising for Fourth Month on Festivals
  • Saudis Using Price Correction to Pressure OPEC Members: SocGen
  • Corn Little Changed After Surprise Drop in U.S. Crop Outlook
  • NLMK May Boost Dividend After Completing Spending, Cutting Debt
  • Power Funds Post Losses as Nordic Weather Confounds Forecasters
  • Rebar Declines First Time in Four Days on China Demand Concerns
  • OIL DAYBOOK: Iraq Tracks Saudi Price Moves; Angola Dec. Exports
  • OPEC’s Choice Is Pricing Power or Sales in New Oil Order: Energy
  • Qatar Commits to 2022 World Cup Spending Even After Oil’s Plunge
  • OPEC’s Kuwait Sees No Oil-Output Cut at November Meeting


























The Hedgeye Macro Team



















Variance And Contentions

This note was originally published at 8am on October 28, 2014 for Hedgeye subscribers.

“Certainty is the mother of quiet and repose; uncertainty the cause of variance and contentions.”

-Edward Coke


Edward Coke was Chief Justice of the King’s Bench in the early 17th century. His aforementioned quote is dead on when I think about it in the context of modern central planning ideology.


Many want un-elected bureaucrats and benches (like the Federal Reserve) to deliver them the elixir of certainty, quiet, and repose. Unfortunately, markets and economies can’t be centrally planned that way. They are grounded in uncertainty and contention.


“Variance” was a thoughtful word for a judge to be using way back then. It’s too bad that the Fed doesn’t talk in these terms. Variance (how far a set of numbers spread out) and correlation risks are at the heart of what modern Macro Risk Managers think about every day.


Variance And Contentions - EL chart 2


Back to the Global Macro Grind


The variance between how political types talk about market risks and how practitioners on the buy-side explain them continues to widen.

That’s not a good thing. With time, humans aren’t supposed to get dumber.


That said, into both the almighty central planning decision tomorrow (Fed meeting) and Q3 GDP report this week, “should I be turned into a vegetable or a happy imbecile?” (Taleb, pg 61 of Antifragile)


Great question! I actually get asked some version of that question, a lot. Bob Brooke, Darius Dale, and I spent all of yesterday meeting with Institutional Investors in Boston. And one of the underlying questions remains – ‘what if it’s different this time?’


A: It’s not.


What we call #Quad4 deflation is like gravity – it occurs slowly, then all at once.


One of the best ways to observe which “Quad” the market is trending towards is through what modern day risk managers call Sector Style Factors (the variance of the stock market’s sector returns):


  1. When Sector Variance is LOW (like all-time lows in 2013) a monkey can be right on the long side (every sector goes up)
  2. When Sector Variance is RISING (like now), sector returns diverge, and momentum monkeys fall from the trees


Low-variance is the birth-child of compressed (low) volatility. And, to a large extent, that’s what the Fed is trying to promise you, in perpetuity. How else could an un-elected ideology live, unless it delivered political “certainty”, forever!


Then, non-linear market risks do what they do, and volatility rips +160% to the upside in 3-4 months (from the all-time #RussellBubble high of July 7th, 2014 to mid-0ctober) and the Fed needs to “smooth” that with the next central plan.


Or so they think…


And what happens when the next central plan loses credibility in delivering the one thing every political animal who has empowered the Fed is whining about when they stump about “inequality” (with the one thing being inflation)?


Oh, the #deflation.


Look at yesterday’s market action, in Sector Variance terms:


  1. Energy Stocks (XLE) down another -2.1% on the day to -7.53% for OCT to-date
  2. Basic Material Stocks (XLB) down another -2.1% to -4.68% for OCT to-date
  3. Healthcare Stocks (XLV) up another +0.1% to +2.14% for OCT to-date


Yep, since Healthcare (XLV) and Consumer Staples (XLP) are the only Sector Styles you’d be really net long of in Hedgeye #Quad4 terms right now (versus short the commodity #deflation sectors), it looks like Mr. Market is confirming a loss of the Policy To Inflate’s credibility.


And what happens after all 3 of the major central planning committees (Fed, BOJ, and ECB) have already cut to zero? Oh, it looks like Sweden is cutting to 0.00% (from 0.25% prior) this morning. Maybe European stocks can go up for another 4 hours on that.


As both volatility and variance risks are rising, the other big market risk that develops is called mean reversion risk.


In other words, now that Healthcare stocks (XLV) are +17.8% YTD (versus Energy -5.3%), prudent Portfolio Managers starts to ask themselves how much more they can pay up to chase Healthcare stocks.


Unless it’s different this time (it’s not), there are historical precedents for what people are willing to pay for things too. Enter the contentiousness of the “valuation” debate. How much are you willing to pay to not lose money?


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.12-2.31%

SPX 1841-1981

RUT 1057-1127

Nikkei 14503-15569

VIX 14.34-28.05

WTI Oil 79.79-81.84


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Variance And Contentions - Chart of the Day

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.46%
  • SHORT SIGNALS 78.35%