“Doubt is not a pleasant condition, but certainty is an absurd one.”
-Voltaire
That’s the opening volley from Michael Lewis in his latest book, The Undoing Project – A Friendship That Changed Our Minds. The friendship he recounts is that of the forefathers of #Behavioral Finance – Danny Kahneman and the late Amos Tversky.
Kahneman is 83 years old now and many of his teachings about “certainty” are adopted into the Hedgeye Risk Management Process. While we’ve been happy about getting growth and inflation right in 2017, we don’t confuse that with 100% conviction.
Anyone can feel convicted when properly positioned for something during a big move. The more momentum a macro factor or market position builds, the easier it gets to become complacent. Doubt isn’t pleasant, but it’s certainly a critical part of our process.
Back to the Global Macro Grind…
If you want to undo someone’s “highest conviction idea” in this business, send the price directly the wrong way for a month. Never have there been so many chasing so few factors like 1-month price momentum.
Yesterday was one of the many great examples of single-factor (price) fear on a single-duration (1 month). Some of the FAANG components were getting time-spanked (see some of their @Hedgeye Risk Ranges at the end of this note):
- Facebook (FB) was -4.5% on the day, taking it to -2.9% on a 1-month basis
- Apple (AAPL) was -0.8% on the day, taking it to -5.5% on a 1-month basis
- Amazon (AMZN) was -1.6% on the day, taking it to -1.3% on a 1-month basis
If you didn’t know that the machines and every fake “quant” (read: chart chaser) is forced to react to 1-month price momentum, now you know. We’ve seen this happen, multiple times, in big cap Tech names in 2017. It’s happening again into a month-end.
But is that it? Has the allegedly “great valuation bubble” of 2017 ended as of yesterday’s Facebook (FB) move?
If you have a certain answer to that question this morning, I’ll call you absurd in our team’s Morning Research Meeting. In fact, if you tell me with 100% certainty anything about a stock’s future direction, I will send you directly to compliance.
Were these epic -0.4% and -1.4% corrections from the Nasdaq and SP500’s all-time closing highs (last week) 100% predictable?
A) No, nothing is…
B) But the probability of a correction was absolutely rising (see Early Looks Mon-Wed of last week for details)
C) When a market signals #overbought with a massive implied volatility DISCOUNT like that, we signal sell-some
Then, when a market price:
A) Moves back to the low-end of the @Hedgeye Risk Range and…
B) Sees future expectations morph from capitulation & complacency to fear and…
C) The NET positioning of the market remains bearish like the Nasdaq’s does…
Then we signal buy-some. That’s where the Nasdaq is this morning:
- Nasdaq’s @Hedgeye Risk Range = 6
- Nasdaq’s Implied Volatility DISCOUNT of last week is now a +20% PREMIUM vs. 30-day realized
- Nasdaq’s falling net LONG position scores -1.38x on a 1-year z-score (i.e. the position is bearish relative to itself)
Sell-some high. Buy-some back lower. As crazy as this might sound, this has been quite a differentiated strategy for US Growth Bulls in 2017. If the momentum of the primary factor, US #GrowthAccelerating, wasn’t readily apparent, we wouldn’t buy the damn dips.
Undoing momentum, of course, goes both ways. We’ve been questioning ourselves on the Reflation Rollover score now for the last few weeks and now have some material market signals that aren’t simple TRADES (3 weeks or less). They’re potential TRENDs.
On our intermediate-term TREND duration (3 months or more):
- Financials (XLF) have moved back to bullish TREND
- The Russell 2000 (26% weight = Financials) has moved back to bullish TREND
- Oil (WTI) just moved to bullish TREND, albeit barely
If both long-term US Rates and the US Dollar are done going down for now, why wouldn’t all of the aforementioned bearish-to-bullish Phase Transitions @Hedgeye make sense? Do they have to make sense? Or does a developing TREND need a story?
One of the few people at the US Federal Reserve that actually matters (NY Fed Head Bill Dudley) changed his story from dovish to hawkish on inflation yesterday saying that “temporary headwinds to inflation are fading.”
If Oil (WTI) remains > $51.38/barrel (i.e. the @Hedgeye price/volume/volatility TREND signal level), Dudley will probably have that right for at least the next month, maybe two. That’s both USD and Rates #Bullish.
The absurdity will happen if Dudley, Yellen, etc. start to raise rates right before US inflation starts to rollover again (against much tougher compares) in NOV 2017 through MAR 2018. Doubting their longer-term forecasting ability should never be undone.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.16-2.30% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
VIX 9.38-11.09 (bearish)
USD 91.30-92.75 (bearish)
Oil (WTI) 48.83-52.25 (bullish)
AAPL 149.65-163.00 (bullish)
AMZN (neutral)
FB 161-175 (bullish)
GOOGL 924-954 (neutral)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
