The Troubling Truth Behind The Rally To All-Time Highs

Takeaway: Volume continues to crash into the all-time closing SPY highs – yesterday’s Total US Equity Volume was down -20% versus its 1-month average.

The Troubling Truth Behind The Rally To All-Time Highs - volume cartoon


The no-volume rally to all-time highs in the S&P 500 is disconcerting to say the least. Why?


No Volume = No Conviction


Here's analysis via Hedgeye CEO Keith McCullough in a note sent to subscribers earlier today:


"Volume continues to crash into the all-time closing SPY highs – yesterday’s Total US Equity Volume (including dark pool) was down -20% and -24%, respectively versus its 1-month and 1-year averages; this cannot be bullish for active vs. passive flows (in June, active saw its biggest monthly outflow since Oct 2008)"


July 19, 2016

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10-Year U.S. Treasury Yield
1.63 1.31 1.59
S&P 500
2,110 2,190 2,166
Russell 2000
1,142 1,233 1,207
NASDAQ Composite
4,851 5,114 5,055
Nikkei 225 Index
14,960 16,779 16,497
German DAX Composite
9,305 10,237 10,063
Volatility Index
12.01 17.14 12.44
U.S. Dollar Index
96.00 97.11 96.59
1.09 1.12 1.10
Japanese Yen
100.39 107.36 106.14
Light Crude Oil Spot Price
43.78 47.09 45.94
Natural Gas Spot Price
2.61 2.92 2.72
Gold Spot Price
1,319 1,374 1,329
Copper Spot Price
2.10 2.30 2.23
Apple Inc.
94.60 100.22 99.83
721 755 736
Netflix Inc.
86.53 99.01 98.81
Alphabet Inc.
699 756 753
J.P. Morgan Chase & Co.
59.70 65.33 63.96
International Business Machines
154 164 159.86

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CHART OF THE DAY: Expensive, Like 1929

Editor's Note: Below is a brief excerpt and chart from today's Early Look written by Hedgeye CEO Keith McCullough. Click here to learn more.


"... Longer-term though, on something like P/E ratios, Shiller has been proven right. Today’s Chart of The Day is a picture Shiller emblazoned into my thick but impressionable skull in the 1990s. It reminded me that today’s US stock market “multiple” looks like it did in 1929 (you can find Shiller’s long-term mean reversion and behavioral research at"


CHART OF THE DAY: Expensive, Like 1929 - 07.19.16 EL Chart

Expensive, like 1929

“When the market diverges from its historical trends, eventually it reverts back to the mean.”

-Richard Thaler


“Eventually” is a good word for an academic or legitimately “long-term investor” to use. That way they don’t have to get the timing and/or risks right. That said, being blind to #TheCycle for the last 20 years has been very painful for those chasing equity market tops.


Thaler’s quote comes from my old professor, Robert Shiller, in a great chapter in Misbehaving called “The Price Is Not Right” (pg 234). Where I grew up in this business (a hedge fund that had an intermediate-term TREND duration to ideas), last price was always right.


Longer-term though, on something like P/E ratios, Shiller has been proven right. Today’s Chart of The Day is a picture Shiller emblazoned into my thick but impressionable skull in the 1990s. It reminded me that today’s US stock market “multiple” looks like it did in 1929 (you can find Shiller’s long-term mean reversion and behavioral research at


Back to the Global Macro Grind


At this price (i.e. the all-time closing high of 2166), even if you believe the “E” (Earnings) embedded in the SP500’s multiple, this is a Top 3 most expensive stock market in US history.


Expensive, like 1929 - earnings cartoon 07.18.2016


While valuation is typically not a catalyst, until central-market-planners take it away from me, it’s still something I have the personal freedom and liberty to not chase. If you’re paid to consider it with other people’s money, that’s a different compensation exercise.


If you’ve owned the SP500’s YTD return of 6%, that’s great. It’s nothing exciting (like Gold and Utilities +25.9% and +20.5% YTD, respectively), but it sure beats getting paid nothing at all. No matter how you were positioned, what matters is what you do from here.


Back to the “E”…


  1. So far 43 of 500 companies in the SP500 have reported GAAP and non-GAAP earnings
  2. In the aggregate (including the generally unaccepted storytelling #s) y/y EARNINGS are down -7.1% QTD
  3. Financials (-8.3%) and Tech (-15.4%) lead losers, underperforming the -7.1% aggregate


But no worries, most of the banks “beat.”


Yep. Fully loaded with non-GAAP trickery and deceit, they “beat” the soft bigotry of low expectations (apologies to George Bush for borrowing one of his best quotes to describe the RNC, DNC, and Old Wall).


But that doesn’t change the fact that the “E” I’m using for a stock market that’s as expensive as it was before the 1929 crash is the wrong “E.” Imagine we used the right number?


Pre-EPS season, the GAAP multiple for the SP500 was about 25x. And pre-EPS season, Consensus Macro was trying to make the call that “earnings have bottomed” based on some of the following factors:


  1. Over-indexing what they “ex-d out” (Energy) from last year’s earnings, “Oil is up” (but down 5% in the last month)
  2. “The US Dollar is down” (even though now it’s up year-over-year)
  3. “The Consumer is hanging in” (that part is actually true, if you don’t deflate what they’re buying to report real growth)


You see, that’s the magic in talking up how a “weak dollar” is giving us +2.3% year-over-year inflation (CPI) … you can’t subtract that inflation from American cost of living (from nominal growth) and print real, inflation adjusted growth. That way, ex-Main St., all good.


But what’s real anymore when it comes to storytelling about “the market” vs. the real economy anyway?


Another by-line about “the consumer” is that they’re still re-ramping their old levered spending binge on big stuff like autos and homes. If you ask the builders though (NAHB reported its JUL #s yesterday), this is what the numbers say:


  1. NAHB Builder Confidence of 59 in JUL (vs. #TheCycle’s rate of change peak in OCT 2015 of 65)
  2. NAHB Sales Activity of 63 in JUL (vs. #TheCycle’s rate of change peak in OCT of 2015 of 70)


There are 2-ways to read those numbers: A) like we do - going from great to good is bad (great time to book gains if you’ve killed it long #Housing for the last few years) OR B) like they do - good is good because everything is always good.


And that leads me to the full circle on the point of this morning’s note. Whether you missed it or nailed it, is buying the all-time high in anything good? Maybe if you’re a super duper short-term chart chaser… maybe it feels good…


But, for my money… from here… I’m not betting that “it’s different this time” and that we don’t have another one of what’s become quite common now for a year in US Equity Beta – i.e. a big mean reversion (lower) AFTER the VIX taps 12.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.31-1.63%

SPX 2110-2190


VIX 12.01-17.14
USD 96.00-97.11

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Expensive, like 1929 - 07.19.16 EL Chart

JT TAYLOR: Capital Brief

JT TAYLOR:  Capital Brief - JT   Potomac banner 2


“I have noticed that nothing I never said ever did me any harm.”

        -  Calvin Coolidge


UNCONVENTIONAL CONVENTION: The highly anticipated Republican convention kicked off last night with a solid celebrity B-list group of speakers and headlined by none other than Donald Trump’s wife, Melania - whose well-received maiden speech is now mired in controversy given stark similarities to Michelle Obama’s 2008 Democratic convention speech. But this convention was supposed to be different – we all expected that - and instead of the usual emphasis on celebrities, the focus would then be centered on politicians who typically serve to give testimonials to the nominee and represent a passing of the torch for the party, but that is in short supply in Cleveland.  Despite the, well, uneven start (more below), expect Donald Trump to grab the torch on his own and run with it.


RULES RUCKUS: The #NeverTrump crowd’s last-ditch effort to invite discord and derail Trump’s nomination was squashed after their attempt to force a roll call vote on the convention rules failed. The group submitted signatures from a majority of delegates in more than the required seven states to force a recorded vote from all 2,472 delegates. However, a number of delegates under pressure from the party reportedly removed their names, allowing the rules package to pass by a chaotic voice vote. #NeverTrump hoped to unbind pledged delegates from voting according to their state’s primary or caucus result and allow them to vote independently. Despite its failure, the spectacle of #NeverTrump’s last stand exposed the lack of unity in the Republican party, embarrassing Trump and diverting media attention away from his message and primetime speeches.


RALLYING REPUBLICANS?: The ten billion dollar question heading into this week’s events is: can the party survive the convention and emerge unified and enthusiastic while scores of Republicans refrain from endorsing (or even mentioning) the nominee? Speaking to the Wisconsin delegation, Speaker Paul Ryan intimated that the party still needed to come together without mentioning Trump’s name once and while TX Senator Ted Cruz is set to participate in the festivities, we understand he will not endorse. Top that off with OH Governor John Kasich’s very public dissing of Trump and the convention in his own backyard - which happens to be a battleground state. In fact, the only former Republican presidential nominee to attend is former Senator Bob Dole – the nominee from 1996. We haven’t mentioned the litany of excuses Members of Congress are using to stay away - from hiking the Grand Canyon to cutting the grass or even taking their kids to watch dumpster fires.


SPOTLIGHT ON OHIO: Hillary Clinton was in OH yesterday – not for the Republican convention – but to address the NAACP conference. Her speech comes after a spate of tragic events in the U.S. and around the world and is a quadrennial stop for most candidates running for higher office - but  this year only one presidential nominee will pay homage as Trump snubbed the group last week. Speaking to a constituency she relied upon heavily to defeat Bernie Sanders, Clinton’s focus was threefold: she spoke on the group’s concerns with their rights and beliefs, used the opportunity to speak on crime and guns, and did it all in a highly sought-after battleground state. Her campaign remains heavily invested in OH and continues to outgun Trump’s organizational efforts especially given his lack of support from the state's popular Governor.


CALL INVITE | BREXIT IMPLICATIONS – A 360° ANALYSIS: Please join us this Friday, July 22nd at 11:00 AM EST as we begin a series of calls on post-Brexit implications. Our first call, in conjunction with the international law firm of Squire Patton Boggs, will examine the legal and procedural implications. You can find call details here.


IT’S OVER: Our geopolitical analyst Dan Christman shared his insight on the Turkish coup’s failed attempt to oust President Erdogan. You can read his piece here.


FCC DROPS RETRANS CONSENT RULEMAKING: In case you missed it, our Telecommunications-Media Policy Analyst Paul Glenchur shared his insight on the FCC closing its retrans rulemaking, how it’s a relief for broadcasters and more of a disappointment for subscription TV operators. You can read his piece here.

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