This note was originally published at 8am on February 11, 2015 for Hedgeye subscribers.
“The heart has its reasons, of which reason knows nothing.”
Leave it to a 17th century mathematician/physicist/philosopher (who was raised by a socialist tax collector in France) to nail what Mr. Macro Market thinks about your investment and risk management reasonings – he does not care.
Of course “he” could be a she – and if the market gods ever let me know on gender, I’ll let you know. The more important point I’m trying to make about markets is that they really don’t care about your political, social, or emotional leanings either.
They don’t care about your research, what school you went to, or your neighbor’s brother’s aunt’s dog. Macro markets care about what they care about – and those things are constantly changing. Your #process needs to embrace that uncertainty.
Back to the Global Macro Grind…
Got reasons for what is moving the US Equity futures intraday these days?
- Is it another bailout or a blowup in Greece?
- Is it a counter-TREND move higher in US Treasury Bond yields?
- Is it the Correlation Risk relationship between US Dollars and Oil?
Your portfolio may be affected by one, none, or all of these reasons. If you can tell me which one of them is going to trump all of the others, please tweet me – because, in the very immediate-term, I do not know.
Here’s what Mr. Macro Market thinks about the upside/downside in what I call my immediate-term Risk Ranges:
- Greek Stock Market (Athens General Share Index) = 680-883
- UST 10yr = 1.62-2.05%
- WTI Oil = $45.04-54.78
In other words, what just happened in all 3 of these counter-TREND bounces (newsflash: Greece, Bond Yields, and Oil have been crashing for the last year) was that they all recently tested the top-end of their respective risk ranges.
Unlike who I affectionately call Chart Chasers, Mo Bros, etc., I’m a fader. I don’t chase prices – instead, I try my best to:
- Have an intermediate-term TREND research view
- Sell/Short at the top-end of the immediate-term TRADE range
- Buy/Cover at the low-end of the immediate-term TRADE range
The least complicated part about this research and risk management process are points 2 and 3. It’s just math. The math generates the immediate-term ranges. It’s both dynamic (changing alongside price, volume, and volatility) and non-linear.
The most complicated is point number 1. What is your trending research view? Does it whip around daily? Or do you have a Bayesian inference #process that helps you change both fast, and slow, as critical rates of change undergo phase transitions?
From an intermediate-term research TREND perspective, here’s what I think:
- Greece remains bearish and broken
- Long-term Bond Yields are bearish inasmuch as our 1H 2015 inflation forecast is
- Oil remains a bearish TREND susceptible to ongoing Global #Deflation risk
Yep, there are multiple factors and multiple research and risk management durations incorporated in what I think. And no, Mr. Macro Market doesn’t care about that. But I certainly respect what he/she thinks, and try to listen to him/her very carefully.
Our immediate-term Global Macro Risk Ranges are:
UST 10yr Yield 1.62-2.05%
Shanghai Comp 3026-3201
Oil (WTI) 45.04-54.78
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer