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

“Believe on this day that I will have been cut to pieces, and you not much later than I…”

-Cyrus

That’s a quote from the latest leadership, strategy, and #history book I have started to read. It’s one of the Greek classics that I’ve been wanting to study for a long time – Xenophon, The Anabasis of Cyrus.

It’s been a classic year of #divergences in Global Macro risk management (Long Bond TLT +18% vs Russell 2000 flat YTD). So ending it any other way than putting myself on the front line, willing to be cut to pieces by SP500 (SPY) bulls, is right where I want to be.

The SPY is the most widely shorted equity security in US history. In all of her manifestations you’ll find hedge fund victories and defeats. While I’ve been on the “short the Russell” road for most of this year, now I’m here, saying sell it. That is #timestamped.

Cut To Pieces - Crazy bull cartoon 08.19.2014

Back to the Global Macro Grind

I’ll get to the fundamental research view in a minute (both growth and inflation slowing, at the same time), but first I will draw my price, volume, and volatility sword on this matter:

  1. PRICE – SP500 signaled immediate-term TRADE overbought yesterday with no support to 2002
  2. VOLUME – Total US Equity Market Volume was -5% and -26% vs its 1-month and YTD averages yesterday
  3. VOLATILITY – front-month VIX closed at 13.86, well above my bullish TREND line of 11.34 support

In other words, even if I was a raging bull on US growth equity fundamentals (like I was in 2009 and 2013), I’d still have signaled sell into yesterday’s no-volume-short-covering-capitulation-overbought highs.

Back to the fundamentals – here are the Top 3 things confirming our bearish view on US domestic GROWTH:

  1. US GDP growth 2.3% (we model it year-over-year, not sequentially) continues to slow from Q413’s peak
  2. US 10yr Bond Yield = 2.32%, continues to crash (-23% YTD) alongside growth expectations
  3. Russell 2000 = 1170, still -3.1% from its all-time #bubble high (July 7th) and signaling bearish TREND

And here are the Top 3 things confirming our bearish view of INFLATION expectations:

  1. Oil continues to crash this morning, -31% since June
  2. CRB Commodities Index (19 commodities) down another -0.6% to 266 is -5% YTD now and making lower-lows
  3. Both TIPS (5Y Breakeven Rate) and Fed 5Y-5Y Forward Breakeven Rates are breaking down to fresh YTD lows

Then there’s sentiment (which I could give you a hocus pocus “survey” on) or use the only one that back-tests as a legitimate contrarian indicator in my 15 years of notebooks (the II Bull/Bear Spread):

  1. Bull’s ramped to 56.4% (from 55.5%) this morning
  2. Bear’s remain at 14.9% (just off their all-time lows)
  3. Bulls minus Bears = Bull/Bear Spread of +4160 basis pts, to the bullish side!

To put that Bull/Bear Spread in context:

A)     That’s +103% from where it was when perma equity bulls were in the fetal position on October 13th

B)      That’s just inside of the all-time wide to the bullish side

#Agreed. All-time is a long time. And that’s precisely why I’m willing to be cut to pieces by anyone who wants to put their own money (not other people’s) on the naked long side of SPY, from here until I say stop.

I’d be happy to publish your bull case to all readers of the Early Look. Remember though, your cost basis is going to be yesterday’s SPX close of 2051. This is the arena of accountability. My timing may prove to be fatal, but there’s no place I’d rather be.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr yield 2.28-2.35%
SPX 2002-2055

RUT 1151-1187

Yen 115.72-117.61

WTI Oil 73.34-76.62

Gold 1130-1205

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Cut To Pieces - SPX Levels refreshed