Consensus Heuristics

“Heuristics can predict their actions.”

-Nir Eyal

That’s from a great chapter in Hooked called “Action” where Nir Eyal cites one of my favorite risk management books of all-time: Thinking Fast, And Slow by Danny Kahneman.

Heuristics = “the mental shortcuts we take to make decisions and form opinions” (Hooked, pg 85)

Yep. The less quantitatively objective investors are about their process, the more predictable I think they are in response to politically qualitative “catalysts.” If all you’ve done is buy stocks on both Brexit, Le Pen, and Trump fears, you’ve crushed it.

Back to the Global Macro Grind…

While the intra-week macro move scored more importantly in fortifying what’s been an outright bullish intermediate-term TREND for US, European, Japanese, South Korean, etc. Equities, contextualizing the weekly moves in FICC remains core to my process:

1. US Dollar Down -2.1% week-over-week finally signaled immediate-term TRADE oversold
2. Euro (vs. USD) +2.5% week-over-week finally signaled immediate-term TRADE overbought
3. Yen (vs. USD) +1.9% week-over-week signaled immediate-term TRADE overbought again
4. British Pound (vs. USD) +1.1% week-over-week signaled immediate-term TRADE overbought
5. Commodities (CRB Index) bounced +1.9% week-over-week signaling immediate-term TRADE overbought
6. Oil (WTI) bounced bigger, +5.2% week-over-week ahead of this week’s OPEC meeting
7. Gold rallied +2.1% week-over-week, trading towards the top-end of its immediate-term risk range
8. Copper reflated +2.3% week-over-week signaling immediate-term TRADE overbought
9. 5-year-5-year Forward Break-evens dropped -4bps to 1.94% week-over-week
10. UST 10yr Yield corrected -9bps week-over-week to 2.23%

In the context of a multi-duration-multi-factor macro model, what does that mean to me?

1. USD oversold (bullish long-term TAIL) = Reflation overbought (bearish TAIL risk)
2. Consensus Macro was short Pounds (3 months ago) and now they’re long Euros
3. The Bond Market’s inflation expectations continue to rollover despite counter-TREND reflations

Yep. I’m using some heuristics (short-cuts) to summarize the complex. I’m cool with that. Fully loaded with getting to where the fish are, it takes a lot of work to realize that a fish is on your hook too. When it’s on the line, you don’t have to overthink it.

You don’t have to overthink the “positioning” of market participants either. While you may (or may not) like and/or agree with that consensus positioning… it is what it is!

Here’s the latest update on macro positioning using non-commercial CFTC futures & options data:

1. SP500 (Index + Emini) net LONG position declines another -53k contracts to +31,447 = -0.47x (1yr z-score)
2. Russell 2000 (mini) net SHORT position increased another +4k contracts to -43,796 = -1.19x (1yr z-score)
3. 10yr Treasury net LONG position increased another +7k contracts to +216,631 = +1.41x (1yr z-score)
4. EUR/USD net LONG position increased another +14k contracts to +39,291 = +2.58x (1yr z-score)
5. GBP/USD net SHORT position decreased another -13k contracts to -35,700 = +1.83x (1yr z-score)

That’s right. Consensus Macro was super short British Pounds 3-6 months ago (average net SHORT position for the last 3 months is -75,175 contracts) and the net SHORT position has been cut in half. So that registers (on a z-score) as consensus bullish in rate of change terms inasmuch as long EUR/USD and 10yr Treasuries scores as outright bullish (and rate of change bullish).

Not surprisingly, given we just hit all-time highs intra-last-week, consensus remains nowhere near Bullish Enough of US Equities. That explains, partly, why the political heuristic of “Trump = Volatility” has been as wrong as wrong gets for the last 6-7 months.

If you want to take mental shortcuts to get to where you’d like to be, that’s cool with me. Just remember that where you’d like markets to go isn’t where they always end up. Qualitative and political Consensus Heuristics have a lot to do with that.

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

UST 10yr Yield 2.17-2.47% (bullish)

SPX 2 (bullish)
RUT 1 (bullish)

NASDAQ 6037-6196 (bullish)

VIX 9.68-15.65 (bearish)
USD 97.00-100.05 (bullish)
EUR/USD 1.07-1.12 (bearish)

GBP/USD 1.28-1.30 (bullish)
Oil (WTI) 45.89-51.15 (neutral)

Gold 1 (neutral)
Copper 2.47-2.59 (bearish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer