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“The effect was invisible to an observer of the overall market or someone studying just a few stocks.”

-Lasse Heje Pedersen

The aforementioned quote comes from a thick book I cracked open on the way to Houston, Texas yesterday titled Efficiently Inefficient, where the author (Pedersen) prefaces his learnings about markets with his experience working at AQR in 2007.

In the summer of 2007 quant fund AQR (co-founded by the colorful Cliff Asness who is a must follow on Twitter) “was profiting from some bets against the subprime market but was starting to experience a puzzling behavior of the equity markets…”


“… equity investors had started liquidating some of their long and short positions, which affected equity prices in a subtle way. It made cheap stocks cheaper, expensive stocks more expensive, while leaving overall equity prices relatively unchanged…”

Sound familiar?

Invisible Shoots - Bull goes... 07.11.2014

Back to the Global Macro Grind

With almost 2/3 of stocks in the Russell 3000 (98% of US stocks you could buy/sell) trading below their 200-day Moving Monkey, even the non-quant-one-factor-price-momentum-chart-chaser sees the decay in the internals of the US stock market at this point.

While every risk management overlay I use signaled the subtle bubble effect in US Equity prices at the summer 2015 high (1st time we went bearish on SPY = July 2015 Macro Themes call), after equity volatility went from 12 to 40 (VIX), it wasn’t subtle anymore.

As a result, consensus equity market bulls spent AUG-SEP “taking down gross long exposure” and “tightening net exposure” to the point that we had the biggest net SHORT position (CFTC futures/options contracts) of the year at the end of September.

Then the epic October squeeze…

Now, after consensus hedge funds have covered some of that -281,000 net short position (down to -181,291 contracts as of last Tuesday’s non-commercial CFTC positioning data), the SP500 has been down for 4 straight days.

But what does it all mean? Does it matter if the SP500 isn’t “down huge” (if you pick the lower-all-time-high as your reference point)? Or is that just a brain-dead thing to say for someone who is supposed to be selling active management products?

Remember, the SP500 was “flat” in 1987 too.

Much like how we measure everything else here @Hedgeye (in rate of change terms), after an epic OCT squeeze, both the SP500 and Russell 2000 are still -2.4% and -8.6% from their all-time closing highs.

Is that a buying opportunity?

How about in the expensive stocks that continue to get more expensive as the cyclicals (which looked “cheap” on the wrong numbers) continue to get cheaper?

Watching Priceline (PCLN) yesterday was interesting, if only because it tests the narrative of how expensive growth stocks can get in a top-down #GrowthSlowing macro market:

  1. Long-term “growth investors” could have bought all the PCLN in the world at $45/share in OCT of 2008
  2. Short-term chart chasers could have established a cost basis of $1454/share in OCT of 2015
  3. After losing -10% of its market cap in 2 weeks, the stock is still expensive at 28x trailing 12 month earnings

I personally have no opinion on PCLN, so please don’t take this subtle US equity market observation personally.

We’ve had an explicitly bearish opinion on inflation expectations (for almost 18 months now) and continue to see Red Shoots this morning when I look across the risk spectrum of Global #Deflation:

  1. Trending Foreign Currency (FX) #crashes around the world are firmly intact
  2. Both the Hang Seng and KOSPI were down -1.4% overnight after failing @Hedgeye TREND resistance
  3. Copper’s crash continues, down another -0.7% this morning to $2.21/lb (-22% YTD after starting 2015 at $2.82/lb)

So, if you’re still telling clients to buy “reflation” on some bogus PMI lag thing, they’re getting deflated by both marked-to-market risk and trending economic demand data. Reminder, last week’s ISM print in the USA was 50.1 (down -7.8% year-over-year).

But, if you’re being honest about everything that’s crashed (so far) in 2015 (Foreign Currencies, Oil, Commodities, Emerging Markets, Energy/Basic Material Stocks, etc.), you might just be subtly cautious about buying expensive stocks at their all-time highs.

To my sell-side competition, the effect of everything I’ve been signaling all year long is as invisible to them today as it was in November of 2007. And I’m totally cool with that. It’s what makes a market.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 2.06-2.38%

SPX 2050-2095
RUT 1149--1205
USD 97.68-99.55
EUR/USD 1.07-1.09
Copper 2.19-2.30

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Invisible Shoots - Chart of the Day