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CHART OF THE DAY: Short Low, Cover High? $IWM $SPX

Editor's Note: The brief excerpt and chart below are from today's morning note written by Hedgeye CEO Keith McCullough. Click here for information on how you can subscribe.

 

CHART OF THE DAY: Short Low, Cover High? $IWM $SPX - zzz Chart of the Day

 

Back to this epic SP500 “correction” that consensus has been positioned for (at the start of this week = YTD high net SHORT positions of -60,044 and -31,909 in SP500 Index + E-mini and Russell 2000 mini contracts, respectively):

 

  1. SP500 was down -0.1% yesterday
  2. SP500 was down -0.1% the day before that
  3. SP500 is down -0.2% from its all-time high

 


Consensus Corrections

“Brevity and conciseness are the parents of correction.”

-Hosea Ballou

 

I figured I’d use that title this morning to pad my open-rates. Bears love to read about corrections.

 

Correction? Looking at futures and options activity, consensus hedge fund positioning has been looking for a big correction for two weeks (i.e. they ramped the net SHORT position in the SP500 and Russell 2000 to YTD highs after the correction we had 4 weeks ago).

 

Short low, cover high, eh.

Consensus Corrections - Bubble bear cartoon 09.26.2014

 

Back to the Global Macro Grind

 

I’ve spent the last decade of my career analyzing relationships between price, volume, and volatility. Before that, all I’d stare at was price. For 6 long years I’d watch some of my bosses and their buddies chase price charts. Sometimes it worked; sometimes it didn’t.

 

Ole school money managers will recall Stan Weinstein’s technical reports and a charting program called TC 2000. While they hopefully worked for some, they didn’t work for me. So I built my own.

 

There’s no need to get into a fight with the point-and-click zoo-keepers of the 50 and 200 day moving monkeys today. My point on this matter is this: a market price has a tendency to put in a short term top when:

 

  1. Volume starts to decelerate into the final stages of the accelerating price momentum
  2. Volatility (in terms of how I calculate historical as a leading indicator) starts to signal higher-lows
  3. Price itself finally signals a series of lower-highs

 

That’s not the SP500, yet (it might be within another full day of fresh price, volume, volatility data today), but it is the Russell 2000. I’m not saying this is going to provide you the elixir of a “technical” life (it’s actually math). But it sure beats chasing charts.

 

As the years have gone by, I’ve added analysts to my risk management #process and, in turn, they’ve added their own ideas, revolutions, and overlays to my timing model. One of the big ones is a z-score to measure what we call the “lean” in Consensus Macro hedging.

 

This is one of the many ways we have tried to quantify one of the 3 core legs to the Hedgeye Process stool – Behavioral Market Analysis. Just as a quick reminder to those of you who are new to reading my rants – those 3 legs are:

 

  1. History
  2. Math
  3. Behavior

 

If our analysis can’t be quantified into one of those 3 buckets, we don’t really find it a productive and/or effective use of our research time. In other words, we don’t do the GDP or markets “feel” thing – and we definitely don’t try to tell markets what they should do.

 

Back to this epic SP500 “correction” that consensus has been positioned for (at the start of this week = YTD high net SHORT positions of -60,044 and -31,909 in SP500 Index + E-mini and Russell 2000 mini contracts, respectively):

 

  1. SP500 was down -0.1% yesterday
  2. SP500 was down -0.1% the day before that
  3. SP500 is down -0.2% from its all-time high

 

This isn’t always the case, but in a centrally-planned-raging-bull-market, it happens frequently. When everyone is positioned for down, and markets go up - consensus capitulates and covers… then volume dries up and volatility starts to rise – then markets go down!

 

Intraday yesterday, the US stock market gave you a preview on what keeps the Pain Trade (higher stocks for longer) in motion. It’s called a Dovish Federal Reserve (see Fed Minutes and/or Hilsenrath parroting the same in the Journal this a.m. for details).

 

So that makes this setup for timing the call on a correction tricky:

 

  1. Higher-all-time highs are bullish, until they are not
  2. The all-time closing high for the SP500 is only 3 days old
  3. We have at least 3 dovish catalysts between now and June 17th

 

Nope. No one said timing markets is easy. But there are north of 14,000 hedge funds out there that are still competing with me on the timing of it all! With over $2.2 TRILLION in assets under management, it’s a crowded game.

 

But, if you’re able to keep your emotions, frustrations, and intellect intact… while, at the same time, concisely measuring the rate of change in net positioning, volume, and volatility… your timing won’t be perfect, but it will be more profitable than consensus.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.97-2.32%

SPX 2105-2139
RUT 1
VIX 12.14-14.48
USD 92.75-96.16
Oil (WTI) 56.31-61.40

Gold 1

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

***Click here to watch The Macro Show live at 8:30am.

 

Consensus Corrections - zzz Chart of the Day


God's Bunds?

This note was originally published at 8am on May 07, 2015 for Hedgeye subscribers.

“God understands more about financial markets than many who write about them.”

-Jean-Claude Juncker, May 6th, 2014

 

Now that German Bund Yields have quintupled, in 8 trading days, I’m thinking God understands more about financial markets and economic cycles than many who try to centrally plan and smooth them.

 

For those of you who don’t know who Jean-Claude Juncker is, he’s the former Prime Minister of Luxembourg (1995-2013) and residing President of the European Commission. This guy is a hard-core Eurocrat.

 

It might just be me, but I was under the impression that these dudes in Europe thought they had this all under control. Didn’t Draghi promise investors “whatever it takes”? If this bond market move is God’s work, Europeans better pray for it to stop.

God's Bunds? - Draghi cartoon 03.05.2015

 

Back to the Global Macro Grind

 

That wasn’t a typo – at one point this morning German Bund Yields flash-crashed, or something like that, to 0.76% on the 10 year. Only last week it was trading at 0.14%. That’s a five bagger!

 

Since I’m bullish on US Treasuries, that’s not good. Despite weakening US economic data (see the rate of change in the ADP jobs report in today’s Chart of The Day), Treasuries have been down for 7 straight days. #EuropeanYieldRamp is the main reason why.

 

To be fair to the revisionist historians, they think this is all supply and demand and/or “fundamentally” driven by things like “higher inflation expectations.” I don’t. This is an outright panic-shift in market expectations.

 

To review where some big market expectations were 10-30 trading days ago:

  1. Draghi was going to keep rates low (in some cases negative), for as long as it takes
  2. European growth was being engineered by this lower-for-longer rate policy
  3. Down Euro was damn good for German, Dutch, etc. “exporters”… and their “stocks”

 

Then, z-z-z-ooom! (or ka-boom, depending on what you’re long)

  1. Euro stopped going down (USD stopped going up) as both US jobs and GDP reports slowed
  2. Oil started to rip on Down Dollar (and a circular supply narrative)
  3. And out of nowhere, despite Down Dollar, European rates started to rip higher

 

This morning alone:

  1. German 10yr Yield = +15 bps to 0.75%
  2. France 10yr Yield = +14 bps to 1.05%
  3. *Japanese 10yr Yield = +8 bps to 0.43% (one of the biggest daily % moves in a decade)

 

And US centric navel gazers are freaking out because US 10yr Treasuries moved 2 basis points off a base of 2.26%. If I’ve said this to investors who have emailed/called me in the last 48 hours 100 times, I’ve said it 1,000 times - #EuropeanYields!

 

If central planners didn’t give markets the “all-clear” expectation, absolutists who say “well, this isn’t much of a move from such low levels” might have a reasonable point. But that’s not how macro market risks evolve.

 

There is a massive amount of leverage that is betting on #LowerForLonger in Europe/Japan, and risk models move in percentage terms, not “valuation” opinions. Forget the +25% move in 30 minutes in German Bund Yields, they’re +514% in eight days. #Again!

 

So what is a man or woman to do when neither stocks nor bonds work?

  1. Raise Cash – we’ve been moving towards our highest Cash position (57%) of the year in the Asset Allocation Model
  2. Wish that you’d raised more Cash… and
  3. Call yourself as dumb as I feel for not selling US Bonds when the #process said buy more

 

To review the #process. We believe that you:

 

A)     Buy long-term Treasury bonds when growth is slowing

B)      Sell them when growth, in rate of change terms, is accelerating

 

And since I personally didn’t get the memo from God on the Euro Bond Yield move, I am going to evolve the #process and implement prayer this morning. Because, to be honest with you, other than raising cash, I don’t know what else to do.

 

Our immediate-term Global Macro Risk Ranges are now:

 

UST 10yr Yield 1.86-2.29%

SPX 2063-2096
RUT 1201-1230
DAX 11101-11304
VIX 13.32-16.51
EUR/USD 1.06-1.14
Oil (WTI) 54.13-61.92

Gold 1169-1203

 

Best of luck out there today,

KM

 

Keith R. McCullough
Chief Executive Officer

 

God's Bunds? - z 05.07.15 chart


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May 21, 2015

May 21, 2015 - Slide1

 

BULLISH TRENDS

May 21, 2015 - Slide2

May 21, 2015 - Slide3

May 21, 2015 - Slide4

May 21, 2015 - Slide5

May 21, 2015 - Slide6

May 21, 2015 - Slide7

May 21, 2015 - Slide8

 

BEARISH TRENDS

 

May 21, 2015 - Slide9


The Macro Show Replay | May 21, 2015

 


We Invite You To Watch The Macro Show

CLICK HERE to watch The Macro Show on Hedgeye at 8:30am ET. We hope you’ll join us every day. 

 

We Invite You To Watch The Macro Show - Macro Show cartoon

 

Since Hedgeye's inception, CEO Keith McCullough has hosted a morning global macro conference call before market open. In our ongoing efforts to be pioneers in financial media, we are now offering this call as a live-streaming video program that we call The Macro Show. 

 

We encourage all of our subscribers to log in to Hedgeye.com each morning and tune in at 8:30am ET, ready to ask Keith and the team their questions. In addition to clearer, higher-quality sound than you would have had over the phone, you’ll get to see the team and any slides they reference. The same dynamism, thoughtful analysis and wit you have come to expect from Hedgeye is not changing. The format in which we deliver it is – for the better. 


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