“A trigger is the actuator of behavior.”
-Nir Eyal
Top of the risk management morning to you from Los Angeles, California. I’ll be in CA all week and I’m looking forward to hosting our 1st ever Macrocosm West conference tomorrow afternoon in San Francisco!
The best part about west coast trips is turning off my laptop and reading, uninterrupted, on the plane. The aforementioned quote comes from a great behavioral book called Hooked – How To Build Habit Forming Products, by Nir Eyal.
Eyal writes about the intersection of social media, behavioral psych, and business. Not surprisingly, his “Hook Model” looks like what it takes to initiate a fractal pattern. He starts with a “trigger” that generates an “action”… and rolls from there.
Back to the Global Macro Grind…
What triggers a short-squeeze? Especially with “expensive” high-short-interest stocks, would a big “beat” (i.e. an acceleration) in revenues do it? How about a youge beat and raise?
You see, amidst all of the macro maven’s shorting the US stock market on political and “valuation” fears, a not so funny thing happened on the way to the short-selling forum: Earnings Season, twice.
Yep, the last two Earnings Seasons (Q4 reported in FEB-MAR and Q1 reported in APR-MAY) have been unadulterated rate of change accelerations in both revenue and earnings growth AFTER 5 straight quarters of a US Earnings #Recession.
Looking at EPS Season to-date, it’s also been a sequential (quarter-over-quarter) #acceleration in both sales and earnings:
- 299 of the SP500 companies have reported their respective quarters
- Aggregate year-over-year SALES growth has accelerated to +8.0%
- Aggregate year-over-year EPS growth has accelerated to +15.7%
- Aggregate year-over-year SALES and EPS growth for Tech has accelerated to +9.6% and +24.5%, respectively
- Aggregate year-over-year SALES and EPS growth for Financials has accelerated to +6.3% and +18.8%, respectively
Is that data too “soft”? Or is it just really hard to swallow?
I can’t for the life of me find a bear who prefaced that they were going to short the US stock market despite their prediction that US corporate profits would be putting on one of their biggest rate of change accelerations in a decade…
Having been squeezed more times than most will publicly admit, what’s triggered me being wrong on the short side more than any other thing is being wrong on sales and/or earnings. Bears need sales and/or earnings to slow, not accelerate!
2 more things to touch on this morning – vol and ISMs…
Vol, as in volatility. As in the thing that every Trump Bear and his brother’s sister’s brother (wait, isn’t that him?) has been predicting about a Trump Administration. Yeah, it’s crashed to fresh cycle and YTD lows!
After crashing -26% last week alone, front-month VIX (US Equity Volatility) closed at a new YTD low of 10.11 yesterday. That’s what happens when the Nasdaq keeps closing at all-time highs (6091 yesterday) and sales/earnings are accelerating.
“Believe me”, I want to short my favorite shorts (i.e. the ones where I think my analyst is right and we’re going to see a sales and/or earnings slow-down), and I finally re-shorted Cerner (CERN) in Real-Time Alerts yesterday after volatility crashed.
Implied Volatility Premiums (vs. 30-day realized volatility) have crashed too:
- SP500’s implied vol premium is down to +1.6% (from +108%, only 3 weeks ago)!
- Nasdaq’s implied vol premium is down to +11.5% (from +105% only 3 weeks ago)
- Russell 2000 has gone from an implied vol premium to a DISCOUNT of -11.6%
There’s certainly some measurable consensus complacency in that. Our rate of change process shows that buying something after it ramps and develops an implied volatility discount is not smart.
And on the ISM rolling over. We’d stay with that Reflation Rollover theme. Metals & Mining (XME) and commodity-linked equities have been some of the best shorts for the past 2-3 months. That’s because the trigger (reflation) signaled a peak, then rolled over.
Short sellers need triggers like a sales and/or earnings slow-down. Valuation isn’t a trigger. It’s a trivial observation.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.20-2.38% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 5 (bullish)
XOP 34.36-36.25 (bearish)
VIX 9.17-11.99 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
