This note was originally published
at 8am on February 04, 2015 for Hedgeye subscribers.
“The two most powerful warriors are patience and time.”
I love that quote. When I think about risk managing my firm, the Global Macro tape, and what I need to improve upon – as I get older, I usually come back to patience and time.
Can I maintain opposing thoughts, across multiple durations, and still operate objectively? Can I help both my team and yours understand the difference between an immediate-term TRADE risk and an intermediate-term TREND?
To me, the words patience and time don’t have to imply “long-term investor.” To be a long-term active risk manager (someone please market their fund as doing so!) you have to be patient so that, sometimes, you can act quickly.
Back to the Global Macro Grind…
Since centrally planned markets move quickly, why wouldn’t you, sometimes, risk manage quickly? As I’ve been sitting here this morning the S&P futures have gone from down 2 to down 9, to down 2 (on a Chinese rate cut), to down 6 twenty minutes later.
Yeah, that’s about as free-market as the Nikkei being jammed +2% into the bell on a “rumor that the BOJ is going to add another dovish member.” Lol! Seriously, like Japan hasn’t been dovish for 2 decades – they are printing 90 TRILLION Yens a year!
To be a warrior of this actively managed tape, in addition to patience and time, you have to have a lot of weapons at your disposal. One of the biggest ones is historical context. Another is keeping yourself together, mentally.
If you have neither context nor emotional control, you will get wrecked.
To review this most recent 3-day counter-TREND move in macro markets:
- It’s all about the Dollar
- Reversing an epic 6 month #StrongDollar move started with a bad US GDP print on Friday
- Down Dollar’s counter-TREND move picked up momentum when the ISM # slowed on Monday
- By Tuesday, the EUR/USD was headed to the top-end of its $1.11-1.14 risk range
- USD had one of its biggest DOWN days in a year (yesterday)
- CRB Index had one of its biggest UP days in a year, closing +3.2%
Yeah, Oil ramped. I get it. If you knew what a Down Dollar move would do to both Oil and the Commodities complex, you should have absolutely got that right too. To remind you where the trending probabilities were heading into this 3-day move:
- USD 3-month inverse correlation to CRB Index = -0.91
- USD 3-month inverse correlation to Crude Oil = -0.95
- USD 3-month inverse correlation to SP500 = -0.29
Sure, it should have been harder to convince yourself that the SP500 could have a big up move on a Down Dollar move – but it really wasn’t that big – certainly not on an absolute or relative basis to the move in Commodities and their linked stock sectors:
- From the Friday closing low of 1995, SP500 = +2.7%
- Whereas the CRB Index ramped +6.6% from its low of last week
- And Oil & Gas Stocks (XOP) ramped +10.4% in 3 trading days
I know, as long as you bought Greek stocks alongside everything that has been crashing in Commodities and their linked US equity sectors for the last 6 months, you absolutely crushed it yesterday.
I am not saying this is easy. I am simply reminding you how the next crisis looks – because you are already in it. It’s called a market volatility crisis perpetuated by central planners who move into panic mode in a final effort to “smooth” the tape.
Yes, do you know what Oil Volatility (OVX index) did in the midst of crude going from $43 to $53? It went up! And the implied volatility for the SP500 on my intermediate-term TREND duration did not change.
No, I do not profess to know how to call this, play by play, with everyone of these countries randomly coming out with made for Bloomberg ad rev headlines on what they are going to try to do to markets next…
But my longest term risk management conviction remains that this epic central planning experiment of markets will not end well. It will end the way that it is already ending – with confusion and volatility. Have patience with that.
Our immediate-term Global Macro Risk Ranges are now (12 macro ranges with TREND signal in brackets like this are in our Daily Trading Range product):
UST 10yr Yield 1.61-1.82% (bearish)
SPX 1987-2066 (neutral)
Nikkei 17292-17889 (bullish)
Greece (Athens Index) 674-849 (bearish)
VIX 16.06-21.87 (bullish)
USD 93.45-94.84 (bullish)
EUR/USD 1.11-1.14 (bearish)
YEN 116.03-118.34 (bearish)
WTI Oil 42.35-52.79 (bearish)
Natural Gas 2.60-2.81 (bearish)
Gold 1255-1291 (bullish)
Copper 2.42-2.59 (bearish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer