Sell Rips!

“Have a good time. Do your best. Let it all coming ripping right through you.”

-Jeff Bridges

I guess that’s one way to look at life. Just let it rip!

And, when it comes to your actively managed portfolio, just keep buying the damn dips and selling the rips. Shorting the reflation ramps has been as good as buying real growth exposures on pullbacks.

Biotech (great way to get long real US #GrowthAccelerating, on dips) absolutely ripped yesterday, leading US Equity Sector Styles with a +2.4% gain to +13.6% YTD. And yes, the US stock market closed at yet another all-time closing high.

Back to the Global Macro Grind…

With the Nasdaq now only -1.3% from its all-time closing high, it would be nice to get another “rout” to capitalize on. That’s the thing with dip buyers. We need rips to sell into so that we can come right back and buy the dip again.

While this happens infrequently in Global Equities, this is what is happening right now (as in this morning):

1. The SP500 is signaling immediate-term TRADE overbought within its bullish intermediate-term TREND
2. The Nikkei is signaling immediate-term TRADE overbought within its bullish intermediate-term TREND
3. The German DAX is signaling immediate-term TRADE overbought within its bullish intermediate-term TREND

It’s a trifecta for any of you who just bought anything but “reflation” in the last 2 weeks. So book yourself some gains! In sharp contrast to the alpha you are generating being long real growth, here’s how Reflation’s Rollover looked yesterday:

1. CRB Commodities Index down another -1.0% on the day to -11.0% YTD
2. Natural Gas (UNG) down another -4.4% taking its YTD crash to -30.1% YTD
3. Oil & Gas Stocks (XOP) down another -0.3% in an up tape taking its YTD crash to -23.4%

You gotta love that. Longs and Shorts working, at the same time. You don’t even have to run with “market exposure” right now. Doesn’t that mean you should expect all of the “market neutral” funds to be absolutely killing it?

We’ll see…

To review the Hedgeye Research Process on why we’ve had both growth (accelerating) and inflation (slowing) right, we’re simply making calls on the prospectively TRENDING rates of change in these 2 major macro factors.

In addition to the RESEARCH process, we have the Hedgeye Risk Management (quantitative signaling) Process. While I am sure some are doing very well right now using only fundamental research, what we do is called quantamental.

In terms of quantitative signaling, across a multi-factor, multi-duration model, here are 3 big things I consider before I suggest you buy dips or sell rips:

1. Where is the price within my immediate-term risk range?
2. Where is implied volatility within the sequence of where it has come from?
3. Where is consensus positioned from a futures & options perspective?

Put differently, here are some ABCs you can consider within your research and risk management process:

A) Are we at the top or bottom of the risk range?
B) Is there an implied volatility premium or discount developing?
C) Is there an extended net long or short position in futures & options contracts?

As an example let’s look at the Russell 2000 (RUT), which just flipped, big time, from oversold to overbought:

1. RUT went from signaling immediate-term TRADE oversold, multiple times in April-May, to overbought
2. RUT went from having a double-digit implied volatility premium in April-May to an implied volatility DISCOUNT today
3. RUT went from having its highest net SHORT position of the year to a net LONG position in less than 4 weeks

I love it when stuff like that happens. It’s non-linearity wrapped in a riddle and a rip all at once!

Back to the ABCs of what not to have done within the context of the process (i.e. don’t be consensus and lose money):

1. Do not short the Russell in mid-April at 1345 because the 50-day moving monkey “broke”
2. Do not short something that’s at the low-end of its risk range with its largest implied vol premium of the year
3. Do not short the Russell AFTER it had a net SHORT position of -72,910 contracts = 1yr z-score of -1.8x

I realize this isn’t easy, but establishing a worthwhile quantamental process shouldn’t be. If building a process that can beat the market was easy, everyone would be doing it.

I think that’s why we’re having so many great client discussions these days. Institutional Investors aren’t paid to be mediocre. They want to beat the market. They want to beat their peers.

And we want to help them do that.

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

UST 10yr Yield 2.13-2.24% (neutral)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6170-6329 (bullish)
XOP 30.12-33.05 (bearish)
Nikkei 194 (bullish)
DAX 125 (bullish)
VIX 9.77-11.44 (bearish)
USD 96.40-98.41 (neutral)
Oil (WTI) 44.06-46.60 (bearish)
Nat Gas 2.85-3.08 (bearish)
Gold 1 (bullish)
AAPL 139.13-149.45 (bullish)
AMZN (bullish)
FB 147-155 (bullish)
GOOGL (bullish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer