Chasing Horses

“A horse never runs so fast as when he has other horse to catch up and outpace.”



That’s a great opening volley of a quote for the latest #behavioral book I’ve cracked open, Top DogThe Science of Winning and Losing, by Po Bronson & Ashley Merryman. For those of you with competitive fire, I highly recommend it.


In the “Foundations” part of the book, the authors introduce a term called #edgework (“a term borrowed from Hunter S. Thompson’s description of anarchic human experience”). “Edgework stems from the way skilled performance brings control to a situation most people would regard as uncontrollable.”


In other words, if you took the Greece, China, and the NYSE halt (amidst a 5-6 week Nasdaq decline) as an opportunity to get really long “new tech” and short everything reflation (Oil, Gold, Russia, Brazil, etc.), you have wicked edgework!


Chasing Horses - z 3 cc


Back to the Global Macro Grind


On the other hand, if you’re like me and you only got one half of that right (avoid #Deflation), you better start interviewing Google (GOOGL), Facebook (FB), and Apple (AAPL) analysts. Non-consensus longs they aren’t – but wow, bros, look at those charts!


Forget chasing charts (or horses) for a second and remind yourself what was the last part of the US stock market to stop going up at the 2007 peak. Remember the Cramer’s “Four Horseman” (hint: it included RIMM) in SEP 2007? I do.


As a cycle guy, it’s been fascinating (but not surprising) to observe that, at all 3 US economic cycle peaks (2000, 2007, and 2015), the cycle slowing perpetuated #bubble multiples in the growth that Wall Street had left to chase.


All the while, the market internals have looked scarier at each of those 3 market peaks. Here’s how yesterday’s looked:


  1. PRICE – SPY (SP500) +0.08% yesterday vs. RUT (Russell 2000) -0.52% = bearish divergence
  2. VOLUME – Total US Equity Market Volume (see Chart of The Day) -21% and -24% vs. its 1-mth and 1-yr averages
  3. VOLATILITY – front-month VIX not being able to close below 12 for the 3rd time in the last 3 months


I hear ya – using price, volume, and volatility is probably cherry picking data (or something like that). But if you back out the move in the XLK (Tech ETF heavily weighted to names like AAPL and GOOGL) which was +0.5% on the day (and is +5.5% for July-to-date!):


  1. Energy Stocks (XLE) deflated another -1.3% yesterday (down -4.9% for July-to-date!)
  2. Basic Material Stocks (XLB) down another -0.9% and is -2.3% to kick off Q3
  3. Russia and Brazil (their stock markets) are -7.4% and -3.3%, respectively, month-over-month


Seriously, if you can’t buy “Global Growth” (until they halt Chinese and European stocks) and you definitely can’t buy “reflation” and/or anything linked to commodity inflation expectations – do you blame people for bucking up for apps and ads?


I don’t. Those were damn good horses to be riding; especially if you:


A)     Sold AAPL at the 2007 #bubble top (and bought it back in 2011 < $35) and/or

B)      Bought the Googler sub $250 in 2011 (when global growth was slowing)


I’d ride those cost basis’ all night long!


Sadly, save some exceptions, this isn’t the way most people “invest” anymore. In 2011, the same guy who was shorting AAPL and GOOGL was probably buying Gold at $1900. It’s just chart (momentum) chasing. And it rarely ends well.


Back to the bearish divergence between the SP500 and the Russell 2000, I think one basic #behavioral factor associated with consensus shorting low and chasing high might explain part of it. Check out the recent move in non-commercial (CFTC) hedging:


  1. SP500 (Index + Emini) net SHORT position of -119,980 at the end of last week registered a -1.63x 1YR z-score
  2. Russell 2000 (mini) net SHORT position of -7,553 at the end of last week registered at +1.31x 1YR z-score


In other words, since a z-score is a measurement of an observation’s relationship to its sample mean (in this case signaling too bearish at -2 and too bullish at +2), Consensus Macro was too bearish on SPY and too bullish on IWM. So they did the opposite.


That tends to happen when people have to hedge out “High-Beta” (as a Style Factor) in their portfolio when big beta stocks are getting smoked (like they did in the 6 weeks prior to last week’s 4 Horsy Ramp). The Russell is “higher beta” than the SP500.


All the while though, “Low-Beta” (stay with it) continues to crush “High-Beta” on a 1-3 month duration. And, if beta chasers in Tech/Biotech see a mean reversion (pullback from the highs), I think they’ll ultimately have to chase low-beta this summer too.


Our immediate-term Global Macro Risk Ranges (and intermediate-term TREND views in brackets) are now:


UST 10yr Yield 2.21-2.46% (bearish)

SPX 2093-2130 (bullish)
RUT 1 (neutral)
Nikkei 209 (bullish)

VIX 11.76-14.53 (bullish)
USD 97.06-98.49 (bullish)
EUR/USD 1.07-1.10 (bearish)
YEN 123.01-125.63 (bearish)
Oil (WTI) 49.46-51.89 (bearish)

Nat Gas 2.65-2.94 (bearish)

Gold 1096-1144 (bearish)
Copper 2.45-2.56 (bearish)


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Chasing Horses - Volume CoDpng

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