“He who sees the past as surprise-free is bound to have a future full of surprises.”
-Amos Tversky
That’s another great risk management quote about revisionist-historians by one of the fathers of #behavioral finance, Amos Tversky. He called this Creeping Determinism:
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“It wasn’t just sports announcers and political pundits who radically revised their narratives so that their stories seemed to fit whatever just happened in a game or in an election. Historians imposed false order upon random events too, probably without even realizing what they were doing.” (The Undoing Project, pg 208) |
Measuring and mapping the rates of change in growth, inflation, and profits is a lot easier than trying to explain other people’s politics. So this morning I’ll stick with my #process.
Back to the Global Macro Grind…
With US Equity Futures down this morning we’re all of a sudden in the middle of an epic 1-week “correction” in US stocks, that has the SP500 down -0.6% from its all-time-closing-high.
Yeah, it’s getting gnarly out there. If you add the implied pre-market correction to yesterday’s closing price, the SP500 is going to be down over 1 full percentage point from a price we’ve never seen before!
Since I’m more sarcastic than I am funny, I’m not going to tell you any jokes about this correction this morning. I’m just going to tell you what I’ve been telling you to do for the last 12 months: that you should buy the damn dip.
Why?
- In the pre-market, the SP500 is at the low-end of the @Hedgeye Risk Range = 2
- Intermediate-term TREND support for the SP500 is all the way down at 2508
- US Equity Volatility (front-month VIX) is at the top-end of the @Hedgeye Risk Range = 8.60-12.07
Nope. There’s no “probability of tax reform” in my advice. It’s simply an apolitical and unemotional mathematical read-through on where one would make better decisions to buy (or cover shorts) than it was chasing last week’s all-time-closing-highs.
Oh, and just fyi, the “low-end” and “high-end” of my @Hedgeye Risk Range market-timing #process isn’t what many might think of as Old Wall Technical “support” and “resistance.” That’s what my TRADE, TREND, and TAIL signal levels are.
You can think of my proprietary @Hedgeye Risk Ranges like the strike zone. The low and high ends of the range are fastballs you can take a good cut at whereas being in the middle of my risk range is a do nothing spot (i.e. they aren’t good pitches = #balls).
The process isn’t perfect. Only Madoff was for some time. It’s simply a better one than chasing high and selling low.
In addition to adding to one of my favorite asset allocations this morning (US Equity Beta via SPY), something new I’m considering is going bullish on the Russell 2000. I’ve been waiting and watching that one closely because:
A) The Russell 2000 is not yet at the low-end of the @Hedgeye Risk Range = 1
B) Unlike the SP500 (SPY) the top-end of the range isn’t seeing a new all-time high as probable
C) The “value” component of the Russell really cares about where long-term UST Yields are within their risk range
So, what I’d like to see to consider taking a good cut at some “value” curve-ball exposure (rather than being long growth because that’s been my right-down-the-Mucker-pipe-pitch to hit for a year now) is the combination of:
- Russell 2000 at or below the low-end of my 1 @Hedgeye Risk Range
- UST 10yr Yield at or below the low-end of my 2.29-2.42% @Hedgeye Risk Range
- The implied volatility PREMIUM (vs. 30-day realized) in the Russell ETF (IWM) ramp to new highs
Since the Russell 2000 has a 26% weighting to the Financials, you can see why it has been so sensitive to things like Reflation’s Rollover (our Macro Themes call from March to August of 2017), and down moves like we saw yesterday in the price of Oil.
So that’s another thing to check-in on before we jump right into the batter’s box and swing away: how’s Oil looking?
A) Post a +2.0% reflation last week and a +15.8% ramp in 3 months, Oil (WTI) has corrected -3% this week
B) The @Hedgeye Risk Range for Oil (WTI) is currently $54.15-58.30/barrel
C) Bullish @Hedgeye TREND support (i.e. the breakout signal level we issued in SEP) for Oil = $49.45/barrel
In other words, if I could dial up my Macro God of the multi-factor realm… and ask him for the most ideal conditions to swing as hard as I can on what I’m waiting on here (a big fat Russell 2000 pitch)…
I’d ask for 2.29% on the UST 10yr Yield, $54.15/barrel WTI, and a really red day of 2017-bearish-narrative-shifting punditry creep.
UST 10yr Yield 2.29-2.42% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
XOP 33.34-37.45 (bullish)
VIX 8.60-12.07 (bearish)
EUR/USD 1.15-1.18 (bearish)
Oil (WTI) 54.15-58.30 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
