“The distance between what you forecast and what actually happened.”
-Phil Tetlock
Not to be confused with Tim Horton’s Brier Cup (or what Canadian Curling fanatics call The Brier), your Brier Score is a probability weighted measure of how good you are at forecasting.
As Phil Tetlock explained in the must-read #behavioral economics book I’ve been citing for the last month, Superforecasting, “Brier scores are like golf scores: lower is better. Perfection is 0.” (pg 64)
No one is perfect. But that doesn’t mean we shouldn’t strive for excellence. We’ve been within 20-30 basis points of forecasting US GDP perfectly for the last 5 quarters. If we’re right on Q2, being positioned for lower-for-longer is going to make for better performance again.
Back to the Global Macro Grind…
But, but… bond yields rose (for a week), gold is getting “hammered” (to +15% YTD), and… if the SP500 can hold it’s short-squeeze day of +1.4% (yesterday), US stocks are going to be up for the 1st week in the last 6…
Doesn’t that mean GDP is going to be 2.5% and the Fed can raise rates in June?
C’mon. Let’s keep it real here. Inasmuch as the SP500 signaled immediate-term TRADE oversold (after 4 straight down weeks) in the 2030-2040 range last week, it will signal immediate-term TRADE overbought in the 2080-2090 range this week.
Oh, and it’s month-end.
That’s when everyone @CNBC who is in the business of marketing “but the market isn’t down” (meanwhile most fund managers they interview are) gets to try to tell you another story about how #TheCycle wasn’t really happening, afterall.
Yes, getting the rate of change in GROWTH And INFLATION right is a major component of having a low Brier Score. But risk managing the range (i.e. trading) of immediate-term oversold vs. overbought is a critical component to scoring well too.
From a Hedgeye #Process perspective, what I mean by that is this:
- Start with your best Bayesian bet on where the intermediate-term TREND is going (our research view)
- Contextualize that TREND within the long-term TAIL duration (i.e. #TheCycle)
- And then just risk manage the immediate-term TRADE range of oversold/overbought signals
I know. This isn’t perfect. But after 17 years of trial and error (making legions of mistakes), this process of marrying my multi-duration cycle research with quantitative risk management signals (multi-duration, multi-factor) is the best I can do.
What do you do? If you’re reading this, I certainly appreciate you having an open mind to what it is that I do.
What I don’t do is chase high and freak-out (sell) low. While it seems like forever ago (in inbox question terms), it was only last week that I wrote to you about 9-10 buy/cover signals, taking Real-Time Alerts to 9 LONGS and 3 SHORTS.
In the spirit of the chapter in Superforecasting that today’s quote about Brier Scores comes from (called Keeping Score), on May 18th, I also took our “Cash” position down to its lowest level of 2016 at 49%.
That’s when bond yields tapped the top-end of my risk range (and stocks sold off to the low-end of the immediate-term TRADE range) though. This morning European, Japanese, and US Equities are trading at the top-end of the range:
- SP500 immediate-term risk range = 2037-2084
- Nikkei immediate-term risk range = 16,331-16,890
- German DAX immediate-term risk range = 92
So I’ll raise my “Cash” position back up to 58% now (selling some US Equity and USD exposure).
Since Utilities (XLU) and Long-term Bonds (TLT) already signaled immediate-term TRADE oversold (lower) last week, the only big thing that I like on the long side that is signaling oversold today (i.e. it’s at the low-end of the risk range today) is Gold.
Gold’s immediate-term risk range is now $1. So I’d buy some at $1215 and sell some at $1260.
Selling and/or buying “some” in something doesn’t mean I don’t have “conviction.” It means I have a process to measure the distance between what I’m forecasting and what is actually happening.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND research views in brackets) are now:
UST 10yr Yield 1.68-1.89% (bearish)
SPX 2037-2084 (bearish)
RUT 1090-1140 (bearish)
NASDAQ 4 (bearish)
Nikkei 160 (bearish)
DAX 92 (bearish)
VIX 13.86-17.58 (bullish)
USD 94.11-95.95 (bullish)
EUR/USD 1.11-1.13 (bearish)
YEN 108.45-110.79 (bullish)
Oil (WTI) 46.98-49.89 (bullish)
Nat Gas 1.95-2.17 (bearish)
Gold 1 (bullish)
Copper 2.02-2.10 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
