Chartist Heaven

08/25/16 07:54AM EDT

“The chartists can at times be correct.”

-Benoit Mandelbrot

You want to see a guy or gal in this business who does “charts” (and no fundamental research) feel like they have some serious stroke? Give them an upward sloping moving average and smash the realized volatility of whatever it is they’re chasing.

Been there, sometimes do that. But, as anyone who has survived bear markets knows, a Phase Transition from bearish to bullish volatility has killed many a myopic monkey in this profession; particularly if a bullish TREND in volatility is sustained.

There’s no doubt that, from a Style Factor perspective, price momentum (single-factor charts) matters big time right now. But, as Mandelbrot taught me, “while it may work at times, it’s not a foundation of on which to build a global risk management system.”

Chartist Heaven - yellen concerned

Back to the Global Macro Grind

There’s still a week or so left in your summer. I challenge you to take a small amount of time to read Chapter 1 of The (Mis)Behavior of Markets (it’s titled “Risk, Ruin, and Reward”) and refute it as poppycock. I think it’s as brilliant as fractal patterns themselves.

“The financial industry has developed other tools. The second-oldest form of analysis, after fundamental, is “technical.” This is a craft of recognizing patterns, real or spurious – of studying reams of price, volume, and indicator charts in search of clues to buy or sell. The language of the chartists is rich: head and shoulders, flags and pennants, triangles (symmetrical, ascending, or descending. The discipline, in disfavor during the 1980s, expanded in the 1990s as thousands of neophytes took to the internet to trade stocks.” -The (Mis)Behavior of Markets (pg 8)

Now, instead of the 90’s internet, they call it the cloud. And we have many more neophytes turned into perceived neuroscientists of the Perma Bull than I have ever seen in my career. Markets that don’t go down (and stay down) are Chartist Heaven!

So let’s not call them chartists (I think it offends them) – let’s call some of them “systematic strategies” ok?

Yes. That’s definitely ok because that’s the buzz in all of Alternative Asset Management right now. ‘Yeah, we love you Captain Stock Picker, but we have these guys who have a “rules-based” strategy which doesn’t really allow them to think about fundamentals.’

I couldn’t make this up if I tried.

And no, I’m not suggesting that purely quantitative strategies (as long as they are dynamic, multi-factor, and multi-duration) aren’t awesome. Especially in raging bull markets, they can crush it. I’m not saying that picking stocks, bonds, or your nose is dead either.

I’m just letting you know, in case you didn’t know.

As anyone who has worked in this business, across cycles (this is my 3rd) knows, great strategies (“systematic” or not) come and they go. The best ones get copied, levered… and then de-levered. They make geniuses of fools and fools of geniuses.

Back to the path of “charts” vs. fundamental research – here’s a topic for you to noodle over this morning - US Housing:

  1. “New Home Sales Beat” (big, on Tuesday); housing stocks (ITB) rip, to lower-highs
  2. Then (yesterday), Existing Home Sales (JUL) slowed -3.2% sequentially to DOWN -1.6% year-over-year
  3. Housing Stocks (ITB) continued lower, after failing to break-out to new highs

Notwithstanding the noise (Old Wall’s Media trumpeted New Home Sales like the Return of The Jedi, and barely mentioned #GrowthSlowing in Existing ones) I have a few contextual points to make about US Housing:

A) Existing Home Sales make up 90% of the US Housing market (vs. New Homes at 10%)

B) A -1.6% year-over-year decline is the slowest rate of change in 23 months

So, Ex-Oil, Ex-Earnings, Ex-GDP of 1%, and Ex-90% of Housing having negative year-over-year fundamentals… what Janet really needs to do tomorrow is pivot back to double-hawkish, like she did in May, right?

“But Keith, the Housing chart (ITB) looks good, bro.”

Yep, for now, so do “charts” of Exxon (XOM) and Chevron (CVX). But all of big cap Energy and Housing stocks in the USA are making a series of lower-highs. And that, in rate of change terms, the one of the best leading indicators of a chart not looking “good.”

By my quantitative signal’s scorecard (baseline 3-factor model = PRICE, VOLUME, and VOLATILITY):

  1. US Housing (ITB) is within 0.9% of going bearish TREND
  2. Exxon (XOM) just broke my TREND signal line
  3. Chevron (CVX) is 1.3% above my TREND signal line

Well, what the heck is the difference between XOM and CVX if the “charts” look barely different and you don’t do any research on Oil, Saudi Policy, their balance sheets, cash flow statements, and/or capacity to borrow to pay their dividend?

Sorry to go all fundamental on you at the end here. But I kind of have to. Fundamentalists can at times be correct too.

Our immediate-term Global Macro Risk Ranges are now:

UST 10yr Yield 1.49-1.59%

SPX 2168-2190

XOP 34.65-37.90

VIX 11.15-14.33
EUR/USD 1.10--1.13
Oil (WTI) 43.09-49.07

Gold 1
Copper 2.07-2.17

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Chartist Heaven - 08.25.16 chart

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