“One method is to try asking the question ‘why?’ as many times as it takes.”
-Nir Eyal
After 4 straight days of all-time closing highs for the Nasdaq (6129) and the SP500 closing at its all-time (which remains a long time) high again yesterday (2399), why can’t the US stock market go higher?
Why can’t US jobs and consumption growth accelerate in Q2? Why can’t US profits continue to accelerate into the end of this Earnings Season and into the next? Why won’t Reflation’s Rollover ensure that the GDP Deflator falls and real GDP rises? Why?
As Nir Eyal explains in a book I’ve been passing around the office called Hooked, “this was the basis of Toyota’s scientific approach… by repeating ‘why?’ 5 times, the nature of the problem as well as its solution becomes clear.” (pg 54)
Back to the Global Macro Grind…
What’s interesting about asking yourself why when it comes to making decisions in your portfolio is that the answers to the questions can vary depending on the duration implied by the question.
Most of the aforementioned questions have to do with a continuation of what’s already become a marked-to-market intermediate-term TREND (3 months or more in duration). Most of my answers to those questions can drive a growth bear squirrel.
Have you ever seen a squirrely bear?
While working in the bush one day, my Canadian cousin Cal got chased by one up a tree … so he sprayed the snarling beast squarely in the eyes with his can of mace … and the bear went, as we say in the homeland, squirrel.
Why? Try it on your neighbor’s dog. You won’t have to ask why four more times.
Why might my answers on why the US stock market can’t go higher be different on my immediate-term TRADE duration (3 weeks or less) than they are from an intermediate-term TREND perspective? Five part answer:
A) At 2405 on the SP500, it signals what we call immediate-term TRADE overbought
B) At 9.58 on the front-month VIX, US Equity Volatility signals immediate-term TRADE oversold
C) At 100.05 the US Dollar Index signals immediate-term TRADE overbought
D) At 2.44% the UST 10yr Bond Yield signals immediate-term TRADE overbought
E) Both Tech and Consumer Discretionary are both within 0.5% of signaling TRADE overbought
“Why?”
A: Because they are. It’s just math.
“Why can’t you give me your math?”
A: Well, if I gave you my price, volume, volatility model, I’d have to kill you.
“Why don’t you want to kill the bears?”
A: Valuation experts and political ideologues are dying a slow death on their own.
“Why?”
A: multi-factor, multi-duration risk management process trumps politics and “valuation” is not a catalyst.
It’s not that complicated, really. If the causal factors driving growth to outperform “reflation” are indeed the rates of change in growth and inflation, all I really need to do to answer “why not higher” is measure and map price, volatility, and volume data.
I didn’t just wake-up today realizing that Mr. Market’s signals, across durations, are much better strategists than anyone you can read on the cornerstone of zero edge. It’s taken me 18 years to learn how not to get squeezed (and sprayed)!
“Why Not Higher?” is pertinent to my process this morning because:
- I’ve raised my “cash” position right back to the highest level I’ve had it in the last 6 months
- For the first time in Q2 I have more shorts than longs (in my Real-Time Alerts product)
- I always ask myself where I can be wrong – I talk to myself all-day, “believe me”
Since I’m bullish (on growth) and bearish (on reflation)… but all of a sudden positioned bearish in the aggregate… I have to admit that I am rather uncomfortable this morning.
“Why?”
A: being short a raging bull market when one is bullish on growth should make one feel rather uncomfortable
“Why?”
A: Cornholio
“Why?”
A: If I have to get into that this morning, I may lose my new compliance officer
“Why?”
A: I don’t want to lose my compliance officer
“Why?”
A: Because he’s new (we hired him from Bloomberg) and I like him
Maybe this is why Taiichi Ohno (founder of the Toyota Production System) stopped people out at 5 whys. At a point, bearishly positioned PMs (who are in the business of being bullish during bull markets) have to start answering their clients’ questions!
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.27-2.44% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6050-6141 (bullish)
XOP 33.70-36.19 (bearish)
VIX 9.58-11.12 (bearish)
USD 98.50-100.05 (bullish)
Oil (WTI) 44.84-48.95 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
