“We specialized in waiting.”
-Matti Friedman
That’s a phenomenal risk management quote from another non-markets book I read while I was on vacation last week: Pumpkin Flowers – A Soldier’s Story.
For those of you who are familiar with the region, there’s a militarily strategic hilltop in Lebanon that borders Israel called The Pumpkin. “Flowers” is the Israeli military code for casualties.
While I’m obviously not equating risk managing markets with how these young soldiers gave their lives up on that hill, waiting & watching are survival skills we learn in markets, especially nowadays, with patience in short supply.
Back to the Global Macro Grind…
Look, I get that it’s not easy for some people to be long what is constantly being advertised as an “expensive” US stock market. Some people run value strategies so, by definition, the all-time high isn’t a marketable entry point to their investors.
That said, there are plenty of stocks that crashed during the 5 consecutive quarter, 200 basis point, US GDP slow-down that bottomed in Q2 of 2016. The Russell 2000 crashed -28% from July 2015 to February 2016’s low, don’t forget.
Yesterday I reviewed the consensus nature of being long Energy (XLE) at the end of 2016. That’s because it became an outright momentum chase in a US Sector Style that was legitimate “value” only 6-12 months prior.
Yes, both “growth” and “value” can morph into being “momentum”…
Cliff Asness (founder of AQR Capital Management) became a billionaire exploiting that very simple but not well understood point. If one wants to be long of price momentum, one buys price momentum without caring much for “valuation.”
Macro markets definitely work that way. Expensive gets more expensive … and cheap gets cheaper.
I’ve argued that two of the most important causal factors in getting that “expensive” or “cheap” right are the TRENDING rates of change in both growth and inflation.
Since our GIP Model (Growth, Inflation, Policy) model signaled a shift from trending US #GrowthSlowing to #Accelerating in November 2016, that’s why you’ve seen me buy literally every damn dip in something like the Nasdaq (QQQ) since.
If you’re going to be buying the damn dips, why not sell the rips?
That’s precisely what I’d be doing on green this morning. It has nothing to do with “changing my mind” or my “conviction levels” on US GDP growth accelerating. It simply means we’re at the top-end of my immediate-term risk range.
Post yesterday’s all-time closing high for the Nasdaq of 5916, here’s what I see:
- Nasdaq’s immediate-term risk range = 5 (more downside than upside, from here)
- Total US Equity Market Volume was DOWN -8% day-over-day yesterday (that didn’t enthuse me)
- Total US Equity Market Volatility is currently signaling bullish TRADE; bearish TREND
Again, I realize that there are a lot of ways to make money and I salute anyone and everyone who crushes the market every single year using no macro and/or fundamental research and relies solely on technicals.
I’m simply not good enough to rely on my quantitative signaling process alone.
If you are going to build a quantitative risk management overlay to your fundamental research process, I highly encourage you to use a multi-factor model that includes the rates of change in things like volume, volatility, options, and positioning.
Don’t forget that at the end of last week you could have bought the Nasdaq at a non-all-time high of 5805. You could have shorted it there and had a really bad week too. That’s what makes a market.
Rather than chasing your emotional and/or political tail every day, chasing high after selling lower, we much prefer waiting and watching. For 6 months, US growth stocks have provided patience plenty of positive returns.
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 34.36-36.94 (bearish)
VIX 12.59-15.98 (neutral)
EUR/USD 1.05-1.08 (bearish)
GBP/USD 1.24-1.28 (bullish)
Oil (WTI) 50.05-52.55 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
