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Are You Positioned Bearish Enough?

Key Takeaway: A myriad of quantitative signals suggests investors would do well to be positioned rather bearishly (within the context of their respective mandates) as we progress throughout 2H15.


Late last week, it was reported by EPFR that global equity fund outflows totaled $25.9B, which was the largest sum on record (data going back to 2002). U.S. equities experienced a $12.3B outflow – the most in 16 weeks. Per Jonathan Casteleyn of our Financials Team:


Domestic equity funds continue their streak of outflows, now at 25 consecutive weeks with another -$5.2 billion reined in by investors in the most recent 5 days. The table below shows all domestic equity outflow sequences greater than 4 consecutive weeks in data going back to 2008. We considered a streak of outflows broken by 4 weeks of consecutive inflows. Within these parameters, there have been 8 total outflow sequences with the mean lasting 40 weeks with $105 billion lost on average. The current sequence, as of August 19th, is only the 8th longest in weekly duration, but at -$101.0 billion in total outflows lost, it is the 4th largest in magnitude. With an average outflow of -$4.0 billion per week, the running 2015 outflow is fastest pace on record in our data back to '08”.


Are You Positioned Bearish Enough? - 1


So everyone is bearish, right? Right.


While it’s easy to naval gaze at flows data or feel warm and cuddly about the spate of bullish reports from bulge-bracket U.S. equity strategists that hit the tape last week, more thoughtful analysis of trends across global macro markets suggests investors would do well to remain on the defensive. The current setup is not unlike the setup we identified in our 7/20 note titled, “Dangerous New Highs for the Market?” where we flagged the pervasive deterioration of market breadth as a bearish indicator, in addition to other factors.


Are You Positioned Bearish Enough? - 2


I: Credit Concerns

Much ado has been made over the trending backup in domestic credit spreads. While certainly not a new factor, we found it worthwhile to analyze what such a backup might imply for U.S. stocks after coming across the following anecdote from Bloomberg:


“Yield premiums on investment-grade debt have widened by 32 basis points over the past three months, according to Bank of America Merrill Lynch index data. Since 1996, there have been five occasions when credit spreads showed similar expansions. Two of them preceded recessions in 2001 and 2007 when stocks went on to drop 50 percent or more. In the other three instances, the S&P 500 fell at least 16 percent while the economy continued to grow. The latest was in August 2011, when the S&P 500 was mired in a 19 percent retreat that almost ended the bull market. Assuming the U.S. economy will be able to avoid a recession this year, as predicted by economists surveyed by Bloomberg, and stocks fall by the average magnitude to reflect similar credit stress in the past, the S&P 500 would hit 1,742, a 18 percent decline from its all-time high reached in May.”


Given the seemingly arbitrary nature of the aforementioned look-back period, we thought we’d perform a similar analysis that holds both the historical OAS observation period and prospective SPX return period constant – at 6 and 12 months, respectively:


Are You Positioned Bearish Enough? - SPX vs. OAS


Based on this analysis, which uses weekly closing price data going back as far as we can get it (2001), the S&P 500 has declined an average of -11.1% over the following twelve months whenever HY OAS have widened as much as they have over the most recent trailing 6-month period (+116bps).


Obviously the Frequentist nature of this study leaves a lot to chance, but if there’s anything to the old adage “credit leads equities”, there may still be a fair amount of downside ahead for the U.S. equity market.


II: Consolidated Positioning

Heading into the drawdown, hedge fund investors were net short of the S&P 500 to the tune of 127,130 futures and options contracts. More importantly, this lean was -1.5 and -1.7 standard deviations below its TTM and trailing 3Y averages, respectively, which implied that said bearishness was becoming rather crowded.


Looking at that same data set, we see that said positioning had tightened by 86,285 contracts WoW heading into last week’s bounce (data though 8/25). While we won’t know for sure until late Friday afternoon, we’re willing to bet that last week’s dead-cat bounce on waning volume was perpetuated by additional short-covering. Even without that information, we can be sure to conclude that the short position has consolidated with a z-score of 0.4 (TTM) and -0.8 (3Y).


Are You Positioned Bearish Enough? - 14


In summary, the data currently suggests that investors aren’t positioned nearly as bearishly as market chatter would imply. Incremental consolidation would imply that investors aren’t at all positioned appropriately for the next leg down.


III: TACRM Signaling Very Bearish

Our Tactical Asset Class Rotation Model (TACRM) continues to be dynamite at prospectively signaling meaningful inflections in performance at the primary asset class level. It’s latest two signals (SELL U.S. equities and SELL international equities) continue to appear appropriate in spite of last week’s short squeeze across global equity markets. The signals prior to that – specifically SELL foreign exchange, SELL commodities and SELL emerging market equities – appear equally as prescient. Refer to slides 6-13 of the following presentation for more details:




With TACRM signaling to reduce exposure to all six primary asset classes, the only thing for investors to do is raise cash – although the “SELL” signal on domestic fixed income, credit & equity yield plays could be sidestepped by deft factor exposure selection (i.e. long long-duration treasuries vs. short credit – particularly junk bonds – as the Fed risks perpetuating deflation by tightening into a global growth scare and a classic #LateCycleSlowdown in the domestic economy).


Other not-so-bullish factors worth highlighting:


  • TACRM is not generating a BUY signal for any of the 117 factor exposures the model tracks across the U.S. (47), Developed International (33) and Emerging Market (37) equity markets. In fact, only one (Irish equities, ticker: EIRL) is registering positive volatility-adjusted VWAP momentum across multiple durations. Refer to slides 17-19 of the aforementioned presentation for more details.
  • Looking beyond domestic and global equity markets, TACRM is generating a BUY signal for only one factor exposure in the entire global macro universe – the ever-defensive Japanese yen (FXY). Refer to slide 16 of the aforementioned presentation for more details.
  • The trending breakout in cross-asset volatility continues unabated, having remained intact since the first week of October. Recall that the model accordions its [independent] historical observation periods according to the trend in global macro volatility, shortening the periods when volatility is trending higher and elongating the periods when volatility is trending lower. The thought behind this is that A) trending breakouts in volatility are usually associated with material changes in the fundamental narrative underpinning any asset class and B) VaR models force investors to de-risk their portfolios and shorten their holding periods on existing and prospective investments. In the context of cross-asset volatility trending higher since 2H14, it is reasonable to conclude that the recent breakout in U.S. equity volatility is unlikely to be a one-off event.


In short, neither domestic nor global macro markets are signaling that it’s appropriate for investors to do anything other than be positioned as bearishly as they can be within the context of their respective mandates.


IV: Broken Market

Keith’s PRICE/VOLUME/VOLATILITY model remains core to our quantitative process. And across all three durations (TRADE: 3 weeks or less, TREND: 3 months or more and TAIL: 3 years or less), the S&P 500 remains broken.


Are You Positioned Bearish Enough? - SPX


The key takeaway for investors here was best summarized by Keith on today’s RTA Live broadcast: “I’d be a seller of pretty much anything U.S. equities until we get the right flush to the downside.”


All told, the aforementioned three signals suggest to us that domestic and global capital markets are likely to remain under pressure throughout 2H15. We expect a series of lower-highs for almost any factor exposure that isn’t tightly correlated to the U.S. Treasury market.


Best of luck out there,




Darius Dale


The S&P 500 (Still) Has the Widest Risk Range Our Model Has Generated Since 2008

The S&P 500 still has the widest risk range our model has generated since 2008.

*  *  *  *  *

The range is 1,835-2,017 with the more probable level being the downside one (-7.7% from Friday’s close), given that the Fed could be tightening into a 0.1% GDP environment here in Q3 (our low-end scenario with the high end being at 1.5% and the Atlanta Fed tracking 1.2%).


The S&P 500 (Still) Has the Widest Risk Range Our Model Has Generated Since 2008 - z Slide37


This is an excerpt from Hedgeye morning research. Click here if you're looking for a trustworthy and accountable risk manager who has a habit of (correctly) making big calls.

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RTA Live: August 31, 2015



Monday Mashup

Monday Mashup - CHART 1


Two quick changes to our LONG bench we wanted to make you aware of, we removed MJN and added HSY. We will be releasing a note on these changes later today.




8/28/15 GIS | Time to Close this Deal



8/20/15 LNCE | Black Book Presentation Replay



Monday, August 31

BETR | Initiated neutral at Goldman Sachs (underwriter of the IPO), price target $18. Current price is $13.31, we see downside from here and continue to have it on our SHORT bench.


Friday, August 28

GIS | Rumors continue to swirl around the divestiture of the Green Giant assets (click here for Hedgeye article)


Wednesday, August 26

THS | Upgraded to overweight from equal-weight at Stephens, target increased to $85 from $75. Treehouse seems to be the leader in the deal for the Ralcorp assets.


Tuesday, August 25

KHC | Recalled turkey bacon products (click here for article)


Monday, August 24

POST | Reinstated outperform at BMO Capital Markets, target is $72



Food and organic stocks that we follow outperformed the XLP last week. The XLP was down -0.1% last week, the top performer from our list was Amira Natural Foods (ANFI) posting an increase of +29.1%. Worst performing company on our list was ConAgra (CAG), which was down -2.8%.

Monday Mashup - CHART 2



From a quantitative perspective, the XLP is bearish on a TRADE and TREND duration.

Monday Mashup - CHART 3


Food and Organic Companies

Monday Mashup - CHART 4

Monday Mashup - CHART 5


Consolidated Consumer Staples Valuation

After the volatile market last week, valuations remain near two standard deviations above the five year average EV/EBITDA multiple.

Monday Mashup - CHART 6


Keith’s Three Morning Bullets

  1. FEDERAL RESERVE – Fischer opted for dovish comments on Friday, making his Saturday comments more hawkish – I guess they look at the S&P Futures now before saying anything of consequence (today he’d be dovish); Fed Fund futures have ramped back up to 38% on a SEP hike probability – reminder: the Fed has never hiked into a slowdown
  2. COMMODITIES – dovish = commodity reflation; hawkish = commodity #Deflation – so the deflation TREND is right back on this morning w/ Oil, Copper, and Russia down -2-3%; WTI’s risk range blew out to $36.99-45.32 on Friday, all but ensuring that massive volatility remains in this asset class
  3. SP500 – still has the widest risk range my model has generated since 2008 at 1 with the more probable level being the downside one (-7.7% from Friday’s close), given that the Fed could be tightening into a 0.1% GDP environment here in Q3 (our low-end scenario with the high end being at 1.5% and the Atlanta Fed tracking 1.2%)


Please call or e-mail with any questions.


Howard Penney

Managing Director


Shayne Laidlaw



Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.37%
  • SHORT SIGNALS 78.32%