“You’re asking the blood in your brain to flow in another direction.”
-Tim Harford
That’s an important behavioral quote that comes from a great book I read over the holidays titled Messy: The Power of Disorder to Transform Our Lives. For market practitioners, having the mental flexibility to change your mind is critical.
Not to be confused with someone who is trying to reach political office or academic tenure, our job is to actually get markets and/or our portfolio positioning right. The best way to do that isn’t to seek certainty – it’s to embrace uncertainty.
Sure, that can be messy sometimes. But that’s where creativity lives – in a mess. Consider how Brian Eno’s (British Producer, Musician, Songwriter, etc.) biographer characterized him: “his frenetic, multi-episodic life can sometimes present a thick miasma of cross pollinated activity” (Messy, pg 23). Oh do I like that!
Back to the Global Macro Grind…
You know what I don’t like? When I’m in the middle of my morning macro process and my youngest child of 4, Reese, starts screaming because she needs her diaper changed. Wow can that be messy. And it was this morning, but I did my job!
Sure, your desk, life, and portfolio can be baby-wipe clean. Cross every t – dot every i. You can be intellectually above all of the muckers in this world and never buy an “expensive” market and never sell a “cheap” one either…
But I highly doubt you’ll differentiate yourself without the creativity you’ll need to make something good out of a mess.
What’s been fascinating to watch on this latest 2-day march back to the all-time closing highs in both the SP500 (2271) and Russell 2000 (1388) is the absolute lack of consensus “smart money” participation.
At least 8 out of 10 mainstream media headlines I read have to do with someone whining about Trump or “valuation.” At a minimum, there’s a political partisanship to that. There’s a macro market ignorance to it too.
Set aside the inconvenient truth of US #GrowthAccelerating data for a second and just look at the market’s signal:
- PRICE: SP500, Nasdaq, Russell = higher-lows, holding TRADE, TREND, and TAIL support
- VOLUME: Total US Equity Volume +44% and +23%, respectively, in the last 2 days vs. the 1yr avg
- VOLATILITY: VIX risk range = 10.70-14.31 = bearish TREND (30 day implied volatility premium was +46%, 2days ago!)
I realize that some of the Old Wall technical types only use the 1-factor (price) momentum chasing model. But even if you take the 30 seconds it requires to do some point and click moving monkey charting, you’ll come up with the same bullish conclusion.
So, if the quantitative signal says BUY the damn dips… and you get fundamental research data supporting that signal, almost daily… then what are you waiting for? A more intellectually acceptable “valuation”?
Flow the blood in your brain the other way on that and think it through. If all the “dumb people” (that’s what a relic of the Street Dot Bomb called Equity bulls and Gold bears prior to this recent ramp) are long… and the smart people are waiting to buy…
Isn’t that super bullish?
I don’t care if you’re dumb, “smart”, or what an unaware young man by the name of Zuckerberg called the people who voted against his political belief system (i.e. the “average people”). To me we’re all human beings who can win or lose, every day.
No, my parents didn’t raise me with the constant reminder that we were part of a “class.” I guess the “smart” people would have called us “uneducated whites.” But you know what – I was hanging out with “dumb” people, so we totally missed that.
Maybe that’s it. Maybe my ignorance is my newfound equity market bullish bliss.
But I don’t think so. I actually sold some Transports (IYT) exposure on yesterday’s +1.0% ramp day. On the way to the top-end of my risk range in the SP500 and Nasdaq (2279 and 5509) I’ll sell some QQQs and probably some Oil & Gas (XOP) exposure too.
Then you know what?
I’ll buy them back when they’re at the low-end of my range. Yep. Just because I’m dumb. And if you want to know something really dumb I might do after that? I might be able to cover some Gold and Long Bond (TLT) shorts on the jobs report too.
Wouldn’t that be dumb and dumber? Imagine, after seeing the rate of change in Non-Farm Payrolls (NFP) slow from #TheCycle high in labor (FEB 2015 = +2.34% y/y growth) to the Q4 2016 low of +1.58% stops slowing, and re-accelerates?
Oh boy. We’re going to need some of the rocket scientists at the Fed to tell us that with US growth, inflation, and jobs all accelerating (in rate of change terms), at the same time, that they finally nailed the economy, using the messy Trump card.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.41-2.61% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 5 (bullish)
XOP 41.40-42.88 (bullish)
RMZ 1110-1171 (neutral)
Nikkei 19067-19699 (bullish)
DAX 115 (bullish)
VIX 10.70-14.31 (bearish)
USD 101.90-103.75 (bullish)
EUR/USD 1.03-1.05 (bearish)
YEN 115.50-118.10 (bearish)
Oil (WTI) 52.11-54.56 (bullish)
Nat Gas 3.19-3.62 (bullish)
Gold 1121-1175 (bearish)
Copper 2.44-2.58 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
