“All of our reasoning ends in surrender to feeling.”
-Blaise Pascal
How does “the market” feel to you? How about GDP? Feeling anything “high conviction” there? How about the ISM running at a 76 month high or US GDP accelerating for 4 straight quarters? Most importantly, how are you feeling about your returns this year?
So many feelings represent so many opportunities to lose focus on the task at hand – measuring and mapping both economic and market data, using mathematical tools and rules as old as Pascal himself.
The more you know about math, the less you’ll care about your personal feelings on macro matters. I’m not suggesting you need to develop a treatise on projective geometry (like Pascal did when he was 16). I’m simply suggesting you continue to learn the lessons I’ve had to re-learn many times in my career – stay data, not emotionally, driven.
Back to the Global Macro Grind…
I’m talking about our feelings this morning because I spent all of yesterday meeting with Institutional Investors in NYC. Today we’ll meet with investors in Connecticut. And I can assure you that not everyone is feeling good about 2017.
That said, if you’ve been positioned on the right side of both Reflation’s Rollover and US #GrowthAccelerating, you’re probably feeling too good at this point in the season.
As opposed to the small and irrelevant sample size that the 12 meetings I’ll have with Institutional Investors represents, here are 3 quantified points of daily context I consider when measuring and mapping market sentiment:
- Where is last price within the @Hedgeye Risk Range (top, middle, or bottom of the range)?
- What does market positioning look like from a futures & options perspective (net long or short)?
- What is the options market (puts and calls) pricing in from an expectations perspective?
None of these points of context matter in isolation. You’ll glean nothing from them unless you are constantly sequencing their respective rates of change across durations. There is nothing easy about this. You have to grind, daily.
A major focus of our research in the last 2 years has been staffing up the man hours we put into the aforementioned 3rd point (measuring and mapping options pricing, skew, etc.). That’s much more valuable than an Old Wall “survey.”
One of the obvious behavorial conclusions is that into and AFTER a major ramp in a market’s price, you can observe both COMPLACENCY (bulls) and CAPITULATION (bears) via implied volatility DISCOUNTS.
In today’s Chart of The Day we’re showing the IVD (implied volatility discount) that has developed in the Nasdaq of -17% (versus 30-day realized volatility), but here are some more big ones that should make you feel aware:
- Consumer Discretionary Stocks (XLY) -11%
- Tech Stocks (XLK) -17%
- SP500 -24%
- Russell Growth ETF (IWO) -28%
Since all 4 of those exposures are also at or approaching the TOP-END of the @Hedgeye Risk Range, I have 2 very good reasons to feel disinterested in buying them today.
Not all of them, however, have massive net LONG positions (there’s a net SHORT position in the Russell). That said, if you’re waiting for trifecta sentiment signals all of the time, you’re going to have to be more patient than I am.
Some of our clients feel flustered when I call something I like #overbought. I get that. And I also get that many of our clients invest on completely different durations using different risk parameters too.
Irrespective of the differing investing styles and durations investors have, modern day Global Macro Risk Management is best executed on the front lines of what happened from a last price, volume, and volatility perspective.
Think about this on a non-linear basis instead of the box the Old Wall still lives in.
If I was your risk manager in the field of war or in observing the risks of avalanche for a ski patrol, would you like me to take days off and come to conclusions about what should happen in those dynamic ecosystems “longer-term”, or would you like me to grind at my post, updating you on the real-time evolution of what is happening?
That said, if you don’t care about immediate-term risk signals, we provide plenty of non-consensus intermediate-term TREND views that you can use to proactively prepare for what should become consensus 3-6 months from now.
One good example of that was a Macro Theme we introduced at the beginning of Q317 called #ChinaSlowing. What we meant by that was that, after reflating on unprecedented stimulus in 2016, “Old China’s” economic growth should slow.
This morning’s data doesn’t disagree with that; Chinese government guys talking about how the Chinese economy “feels” ahead of their Communist Congress in October do. Here’s this morning’s China Industrial Production report in context:
- JUNE +7.6%
- JULY +6.4%
- AUG +6.0%
I feel nothing at all when I read those numbers. In rate of change terms, they are #slowing. Period.
As a result, I wasn’t chasing stocks in Singapore into their July highs inasmuch as I didn’t make much out of the macro tourism “demand” narratives associated with the “Copper Chart.”
And so risk marches on…
Singapore’s Straits Times Index (STI) closed down another -0.4% on the #ChinaSlowing “news.” Unlike the Nasdaq 100, which is +1.6% in the last month to all-time highs, STI is -2.9% in the last month and signaling bearish TREND @Hedgeye.
Copper is down over -3% in the last 2-days and just broke the @Hedgeye immediate-term TRADE support line of $3.01/lb, but is still above @Hedgeye TREND support of $2.85/lb.
Spanish stocks are down another -0.6% this morning, down -1.6% in the last month, and down -7.3% from where you could have been sucked into “Buy Europe” at the cycle high (Q217) of European GDP growth.
Yes, there’s always a bear market developing somewhere. And US Growth is not yet it.
We only recently (July 2017) moved to the #EuropeSlowing and #ChinaSlowing bear camps. I have no fundamental research reason to surrender those positions anytime soon.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.03-2.22% (bearish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
IBEX 10040-10440 (bearish)
VIX 9.65-12.55 (bearish)
USD 91.20-93.25 (bearish)
Copper 2.92-3.09 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
