Cute Counting

“Not everything that counts can be counted… and not everything that can be counted counts.” –Albert Einstein

Yesterday’s intraday selloff was plain ugly, and it fortified the US market’s intermediate bearish “Trend”. Within the context of the immediate “Trade” I was riding, and given the pre market facts I was counting, I got too cute and too bullish at the top of my targeted S&P range of 1 (the intraday high at 10:45am on Wednesday was 1289). Thankfully, one thing I definitely didn’t count on was this idea of buying the US Financials. Never mistake a “Trade” for a “Trend”.

Yesterday was the worst US market decline since June 26th. Homebuilders and Financials led the way lower, trading down over -12% and -6% on the day respectively, reminding the perpetually bullish that their momentum chasing models should be checked at the pool this summer. It lasted 6 vicious trading days, and now the bull shark short covering rally is over. If the XLF (Financials Index) breaks $20.58, I think it could crash for a -24% down move from yesterday’s close.

Larry Kudlow says “no no … that was not a bear market rally Jack – this is a Goldilocks summer rally!” (Jack as in Jack Gage, Forbes Magazine Associate Editor). Jack Gage is Larry’s new lap dog and has about as much experience trading markets as Jack McCullough, my 8 month old son. Almost every answer Gage gives Larry is “absolutely” – didn’t this guy get the Wall Street memo – that meme machine catch word is about 15 months old. Thanks for the guest appearance big guy. Nice suit though.

There were 2 critical macro data points released after I wrote my note yesterday that needed to be counted: Weekly Jobless Claims and Existing Home Sales. The jobless # shot up at 8:30am, and the unsold inventory of American homes was reported at a bloated 11.1 months of supply at 10:00am. Since I am data dependent, these were critically bearish pieces of yesterday’s macro picture that I was not able to address. At 406,000 claims, the 4 week moving average returns to its bearish “Trend” line ascent. Ahead of next Friday’s US employment report, the sober did not want to be long that call option. The “Trend” of American homeowners and banks alike marking their assets to model rather than to market remains. The US housing inventory glut will remain for as long as the country lives in this fairy tale land of listed home prices. It’s where the cash buyer bids that counts.

No, not everything that can be counted in this macro picture actually counts. Inflation and growth do, however. Global inflation can decelerate as economic growth deteriorates further. There are no rules saying they can’t. However, there are a whole lot of “growth” investors globally who won’t know what to do with stocks in their portfolios when deteriorating revenue growth is factored into their models. Companies getting crushed when they guide down also remains a bearish “Trend.”

If you’re long everything fertilizer, Brazil, energy, or Russia – it’s all one and the same. As inflation deflates, so will the equity prices associated with growth expectations incorporated in these commodities, companies, and countries. Brazil got hammered again yesterday, trading down another -3.3% to 57,434, taking its cumulative decline since our “Fading Fast Money” call on 5/20 to -22%. Russia is getting pounded this morning, leading European indices lower, trading down -4.7% so far. Coincidentally, Russian stocks are now down -21% since 5/21. These asset class correlations can be counted, indeed.

So what to do with this mess? I think, at minimum, you have to be getting your portfolio back into its crouch of neutral market exposure. That’s what I opted to do intraday at least. My positive macro callout list was largely calling out the implications of inflation slowing, so I didn’t want you to be levered long commodity exposure yesterday, and I certainly don’t today.

Long China, short Japan makes sense to me in Asia. Short Europe outright until the US Federal Reserve re-flates the US Dollar and deflates the Euro. European currency inflation is killing their economy and the ECB’s Klaus Liebscher is perpetuating a broad based European stock market selloff this morning with this comments that “we have more room to raise rates.” This hawkish rhetoric made sense with the CRB Commodities Index at 472 in early July, not this morning. Commodities are -13% lower in three weeks.

Considering “everything that counts” in my macro model, my new S&P 500 target range is 1212 on the low end, and 1277 on the high end. Look for shark jumping at the top, and bedlam at the bottom.

Have a great weekend,

KM


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