This note was originally published at 8am on November 11, 2014 for Hedgeye subscribers.
“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.
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):
- Volume was down -8% versus its 1-month average volume
- 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:
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:
- LONG: Healthcare stocks (XLV) led yesterday’s rally, +1% on the day, to +22.3% YTD
- 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%
WTI Oil 75.69-79.16
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer