“Strike boldly; it is your habit, and the means of your elevation.”
-John Catron
That’s the opening volley in an interesting US History book I cracked open this week titled Polk: The Man Who Transformed The Presidency of America, by Walter Borneman.
“Strike boldly, is your habit…”
The same advice that US Supreme Court Justice, John Caltron, gave James Polk in 1837 could be given to the US stock market in 2017. With complete and utter disregard for the political nausea in this country, the Russell 2000 closed at an all-time high yesterday.
Back to the Global Macro Grind…
All-time, as history students know, is a very long time. And while it’s true that the SP500 didn’t close at an all-time high yesterday, it’s also true that it closed up +0.9% on the day and is back to within -0.5% of its record close of 2453.
So you’re looking for short ideas? I have at least 3 for you this morning:
- The Euro (vs. USD)
- Levered US Energy Companies (SEMG)
- Reflation’s Rollover (XME)
That last one was the 1st ticker we highlighted in our Q2 Macro Themes presentation back at the beginning of April, 2017. Back then, not unlike Oil & Gas Stocks (XOP) this morning, the Metals & Mining ETF (XME) had an implied volatility discount.
When I’m looking to signal SELL on shorts, amongst other factors, here are some of the timing questions I ask myself:
- Where is the price relative to the immediate-term risk range?
- Where is consensus positioned and what are my catalysts?
- Where is implied volatility relative to where it’s been?
When the SP500 signaled immediate-term overbought (early Monday morning – see Real-Time Alerts for #timestamps):
A) It was approaching the top-end of its immediate-term risk range
B) Had a net LONG position of only 8,535 contracts (futures and options)
C) And had an implied volatility discount (vs. 30-day realized of -6%)
Then, after it “corrected” less than -1.0% in 2 trading days, the SP500:
A) Tapped the low-end of its immediate-term risk range
B) Still had a net LONG position with a z-score of -0.5x relative to itself + quarter end as a catalyst
And this morning implied volatility (vs. 30-day realized) for the SP500 has ramped back up to a +22% premium from that -6% discount. If you’re a US stock market bull, you gotta love that!
I realize my risk management and timing process is far from perfect. That’s why I work at evolving it, every day. But, unlike many pundits and “signaling” services you can pay for, I’m transparent and accountable about what it is that I do and why.
Back to those 3 short ideas, the reason why we try to strike boldly when market timing makes sense is that we have an independent and fundamental research process that is perpetually in motion alongside our quantitative signaling process.
While they are meant to be more accurate than they are bold, I’ll present our Top 3 Global Macro Themes for Q3 of 2017 tomorrow at 11AM EST. These are the Top 3 Things that we believe are not yet consensus but becoming probable outcomes:
- Real Growth #Accelerating: We remain well above consensus on U.S. economic growth with respect to the intermediate term and are keen to detail the positive impact of disinflation, rising asset prices and elevated confidence readings are likely to have upon the real economy here in the U.S. in the face of receding base effects for GDP. Pro-#Quad1 sectors and style factors should continue to lead the way higher within the domestic equity market.
- #EuropeSlowing?: Contrary to our positive outlook in the U.S., our model is prospectively signaling a concomitant deceleration in both economic growth and inflation across the Eurozone economy. This view is very counter to consensus that remains extremely complacent on the long side of the euro and European equities. We think the appropriate play for 2H17 is to be short of the former and rotating into defensive exposures within the latter (i.e. long “R.U.S.T.”/short banks and long Germany/short Spain and Italy).
- #ChinaSlowing: We continue to think the nascent inflection in the “Old China” economy is likely to develop into a negative trend throughout 2H17 amid tighter policy, insurmountable base effects and a myriad of structural headwinds that have yet to be meaningfully addressed. This outcome has dire implications for commodity-oriented reflation broadly.
In summary, I’m hoping to elevate the debate on how Real US Growth can #accelerate during both Reflation’s Rollover and rate of change slow-downs in both China and Europe.
Our immediate-term Global Macro Risk Ranges (intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.12-2.26% (bearish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6193-6297 (bullish)
VIX 9.65-11.29 (bearish)
EUR/USD 1.11-1.14 (bearish)
Oil (WTI) 42.03-45.71 (bearish)
Gold 1 (bullish)
Copper 2.59-2.70 (neutral)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
