• Avoid This ‘Bearish Black Hole’ → Get Our Favorite ETF Ideas

    We warned investors about a “black hole of risk.” It’s here. Prepare yourself for what comes next. Get our Macro team’s favorite ETF ideas (and risk management levels) with 30-days free of “ETF Pro Plus.”

“While a trigger cues an action, motivation defines the level of desire to take that action.”

-Nir Eyal

At a Hedgeye offsite meeting yesterday, I focused our senior leadership team on some of the learnings from Nir Eyal’s Hooked book that I’ve cited in recent Early Looks. One of the behavioral models he considers is the Fogg Behavior Model.

The formula for Fogg is B = MAT “which represents that a given behavior will occur when motivation (M), ability (A), and a trigger (T) are present at the same time… Fogg states that all humans are motivated to seek pleasure and avoid pain; to seek hope and avoid fear; and finally, to seek social acceptance and avoid rejection.” (pages 62-63)

Sound familiar? The polarizing, partisan, and political media is perpetually trying to tap into our predictable behavior. As you glance or glare at the latest Trump headlines this morning, I encourage you to emphasize repeatable investment #process over politics.

Modeling Our Behavior - hooked nir eyal

Back to the Global Macro Grind

After a tidy two-day “correction” in the US stock market, they ramped right back to the all-time highs yesterday. Having covered all but one of my shorts in Real-Time Alerts on red on Friday, I was satisfied with that. Now I can start making sales again.

Why? (using the B = MAT model)

A) I am motivated to buy/cover on red and sell/short on green (with accuracy) because that’s how you win the game

B) I have the mental ability (flexibility) to be bullish and/or bearish at different market levels

C) I have a Risk Range #Process that triggers short-term buy/sell signals within my intermediate-term views

Now that the SP500 and Nasdaq closed at freshly squeezed all-time highs of 2402 and 6149, respectively, what levels would trigger some decisions to make sales?

  1. SP500 = 2407 (or higher)
  2. Nasdaq = 6158 (or higher)
  3. VIX = 9.67 (or lower)

And to be crystal clear, these are simply immediate-term (as in now) overbought/oversold signals. If you’re not into the immediate-term market trigger and timing thing, just stick with our longer-term call that:

A) Reflation’s Rollover remains a trending Macro Theme

B) Real US Growth is #Accelerating (on a trending basis) as a result

C) US Profits #Accelerating (on a trending basis) remains obvious

That’s right. That means you’re short/underweight Commodities and long real growth sectors like Tech (XLK) and Consumer Discretionary (XLY) and probably quite happy about that.

Why?

  1. 91 of 100 names in the Nasdaq have reported their respective quarters
  2. Aggregate year-over-year SALES growth has accelerated to +12.7% y/y
  3. Aggregate year-over-year EPS growth has accelerated to +17.3% y/y

And the “you just wait” US stock market bears wonder why their 9 or 13 month lag PMI “model” or Trump Fear(s) aren’t panning out? If you got the sales and earnings growth accelerating calls right, you’ve got the +18.72% 6-month return in the Nasdaq right.

If you have competition who is not motivated by accurately measuring and mapping the rate of change in big macro things like Growth, Inflation, and Profits, we encourage you to leave them alone while we prove that active manager returns are back, baby!

Remember, there’s always a bear market developing (on a trending basis) somewhere too. If there ever was a day in Q217 to reiterate our Reflation’s Rollover Theme, it’s today.

Why?

  1. The CRB Index (19 Commodities) signals immediate-term TRADE overbought at another lower high of 185
  2. Oil (WTI) signals immediate-term TRADE overbought within its bearish TREND at $49.48/barrel
  3. Copper, Corn, Wheat, Cattle, Coffee, etc. are already rolling over (again) this morning into the red

While our Macro Themes for Q2 are designed to trigger your thoughts and actions, the motivation to both generate alpha and beat the competition on Wall St. will always define the level of desire I have to get up and execute on the process every morning.

Our immediate-term Global Macro Risk Ranges (and intermediate-term TREND research views in brackets) are now:

UST 10yr Yield 2.29-2.43% (bullish)

SPX 2 (bullish)

NASDAQ 6105-6158 (bullish)

VIX 9.67-10.98 (bearish)
EUR/USD 1.08-1.10 (bearish)
Oil (WTI) 44.99-49.48 (bearish)
Copper 2.46-2.57 (bearish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Modeling Our Behavior - 05.16.17 EL Chart