“Eagles don’t flock.”
-Ross Perot
After signaling immediate-term TRADE #Overbought @Hedgeye on Tuesday, now the US stock market is signaling immediate-term TRADE oversold within its bullish intermediate-term TREND as real US Growth continues to accelerate.
Back to the Global Macro Grind…
There’s no need to try to get cute with prose this morning. It’s time to get in the game and execute on the process. We’ll let the flock sell lower after failing to sell higher. Thankfully, they’ve been doing that all year.
First, to put yesterday’s 1-day price correction in context, here are the Top 5 SP500 Down Days for 2017 to-date:
- 05/17: -1.82%
- 08/10: -1.45%
- 03/21: -1.24%
- 07/06: -0.94%
- 06/28: -0.86%
You can tell me how your competitors did if they sold US Growth Exposure on May 17th and bought protection. They’d have been much better off shorting something like the French stock market back then (the CAC40 in France is down -7% since).
With approximately 2.6 million puts and calls trading in VIX options yesterday, that was a record high for a 1-day capitulation. For those of you who have traded markets for the last 20 years, you really have to ask yourself what, precisely, caused such a panic?
Especially when I’m positioned to take advantage of it, I like to see people panic.
Other than the US stock market explicitly signaling immediate term #Overbought at Tuesday’s all-time high, what changed?
- PRICE: SP500 is now at the low-end of it’s immediate-term @Hedgeye Risk Range of 2
- VOLUME: Total US Equity Volume (including dark pool) was 0.0% and -3.0% vs. its 1-mth and 3-mth averages
- VOLALITY: front month VIX ripped (like it has multiple times this year) to close at 16.04
In other words, while the flock panicked to buy protection in the options market, they didn’t sell torrential volume in the equity market. They didn’t even come close to breaking the SP500’s bullish TREND support level of 2324 either.
*Reminder: amidst the “rout”, the SP500 is -1.7% from its all-time closing high.
And I know, I know. Every strategist who has been calling for a “correction” (the whole way up) is back on the tube, nailing it. Heck, maybe they get that elusive “5% correction” to help re-coup some of their losses… but if they get that, all of consensus will too.
Here’s a look at how freaked out consensus just got in terms of expected future volatility:
- SP500 now has an implied volatility PREMIUM (vs. 30 day-realized) of +70%!
- Consumer Discretionary (XLY) has an implied volatility PREMIUM (vs. 30-day) of +52%
- Nasdaq 100 (NDX) has an implied volatility PREMIUM on the same duration of +47%
So I’d buy (or cover if you shorted US Equity Beta on Tuesday, buying protection when you should have… i.e. when it was on sale) all 3 of those exposures this morning. The Macro ETF exposures = SPY, XLY, and QQQ.
Ex-German Stocks (DAX) registering an immediate-term TRADE oversold signal this morning (that’s in the midst of a -7% correction too), something else to be aware of this morning is that 10yr Yields in both the USA and Europe should signal oversold too.
On the heels of a ‘good luck with your 2% ECB inflation target’ French Consumer Price Inflation (CPI) report of 0.70% for the month of July, France’s 10yr Yield has traded straight back down to +0.68% and the Swiss 10yr Yield has mean reverted back to -0.24%.
Yes, long-term Bond Yields are oversold this morning. But the flock still doesn’t get that that’s all about Reflation’s Rollover… with the net beneficiary of that Macro Theme being an acceleration in real Q3 US consumption growth.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.16-2.27% (bearish)
SPX 2 (bullish)
NASDAQ 6184-6430 (bullish)
DAX 111 (bearish)
VIX 9.38-16.47 (bearish)
EUR/USD 1.16-1.18 (neutral)
Oil (WTI) 47.73-50.10 (bearish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
