“They tied a can to me.”
-Jack Buck
That’s what the late Jack Buck (Joe’s Dad) told his wife after he got fired by CBS in 1976. He went on to do play-by-play right up until his death in 2002. His high-integrity career landed him in multiple Hall of Fames.
If you’ve never been canned, it’s a great life experience. I cannot thank the people that fired me in 2007 enough. Ultimately, they gave birth to the inspiration that is Hedgeye. As a result, to this day I cannot learn enough from my mistakes.
With both Brian Williams @NBC and Bill O’Reilly @Fox getting shown the accountability factor, I think our children are learning some valuable lessons too. Principles still matter to a lot of people in this country. They are the bedrock of trust.
Back to the Global Macro Grind…
Our founding principles remain Transparency, Accountability, and Trust. Our macro market views never start with politics. They’re grounded in being data dependent.
Instead of O’Reilly, I encourage you to focus on The Oil Factor in markets this morning.
While the Nasdaq and Russell 2000 were still able to bang out +0.23% and +0.44% daily gains yesterday, the almighty Dow Bro took a brow beating as Oil had an epic intraday reversal.
Here’s how the score looked by day’s end:
- Oil (WTI) down -3.8% on the day, taking Oil’s 6 month loss to -7.6%
- Oil & Gas Stocks (XOP) -2.8% on the day, taking its 6 month loss to -0.1%
- Big Cap Energy Stocks (XLE) -1.5% on the day, taking its 6 month loss to -3.4%
From a process perspective, it’s always important to contextualize immediate-term macro moves across durations. The intermediate-term TREND (today I’m highlighting 6 months) for “Reflation” remains one of the most bearish on my screens.
That’s not to say there may not be a short-term trading opportunity here in something like the XLE. When I think about that I’m much more focused on my immediate-term TRADE duration and I ask myself the following questions:
- What are the intermediate-term TREND research and quantitative signals?
- Where is the price within my immediate-term risk range?
- What’s the direction of implied volatility been mapping towards?
In Energy’s (XLE) case, since it’s still signaling bearish TREND that makes buying it at the low-end of my range less enticing than something like Biotech (IBB), which is bullish TREND from both a research and signaling perspective.
So I signaled buy in IBB yesterday in Real-Time Alerts instead of XLE. That said, if I was short XLE here, I’d definitely cover some. It’s signaling oversold at the low-end of its immediate-term range.
From a longer-term “value” or anti-mo-mo buyers perspective, I think buying XLE is a lot easier today than any other day in 2017. That’s mainly for 3 reasons:
- The underlying volatility signal of Oil itself is no longer bullish (OVX TREND resistance = 31.67)
- Oil’s (WTI) intermediate-term TREND signal remains bullish (TREND support = $49.29/barrel)
- The implied volatility premium (vs. 30-day realized) is at multi-month highs at +30.2%
You see, AFTER the 10 month ramp in both Oil and Energy Stocks (XLE) in 2016, they both became over-owned momentum exposures within a big bullish macro theme called Reflation.
In conjunction with all of that chart-chasing and book-marking into 2016 year-end came both a massive net long position (greater than 2 standard deviations in CFTC futures/options positioning) and an implied volatility DISCOUNT.
So this is a great lesson for all of us to learn, together:
A) When something has massive price momentum TRENDING price momentum
B) And it builds a massively youge net LONG position (futures and options contracts)
C) And implied volatility trades at a DISCOUNT to realized…
Then that’s not where you get loud and long. It’s where you book gains.
As I’ve been pointing out since our Q2 Macro Themes Call, the only 3 big places that were over-owned on a macro theme (reflation) that was rolling over AND had implied volatility discounts were Copper, Metals & Mining Stocks (XME), and Oil related equities (XOP and XLE).
Now that they’ve all been canned with draw-downs, the risk is more rear-view looking than it’s been all year. After you get fired, sometimes the upside (from the lows) becomes clearer!
Our immediate-term Global Macro Risk Ranges (intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.18-2.40% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 5 (bullish)
XOP 34.55-36.91 (bearish)
VIX 12.09-15.99 (neutral)
USD 99.20-101.45 (bullish)
EUR/USD 1.05-1.08 (bearish)
GBP/USD 1.24-1.28 (bullish)
Oil (WTI) 49.90-53.41 (bullish)
Nat Gas 3.06-3.31 (bullish)
Gold 1 (bullish)
Copper 2.50-2.60 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
