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“People choosing what they ‘most want’ is not all that helpful as a theory to predict human behavior.”
-Amos Tversky 

Ever take Econ 101 at a liberal arts college? Ultimately, independent thoughts like the aforementioned one made Tversky unpopular with the linear-economics crowd. They were paid to believe and teach some version of Bernoulli’s “rational utility theory.”

As Michael Lewis goes on to explain in The Undoing Project: “What saved ‘expected utility theory’ from being so general as to be meaningless were its assumptions about human nature.” (page 253)

Especially in markets, there is no doubt that one can consider some humans to be rational in their decision making. There is also no doubt that another human could consider one’s “rational decisions” to be irrational. Prevailing conditions matter.

Predicting Bull & Bear Behavior - 11.20.2017 bull Thanksgiving cartoon 

Back to the Global Macro Grind…

One of my favorite new one-liners to use on 2017 US Growth Bears (who can be seen in the Cartoon of The Day looking for some turkey!) is “if the Nasdaq wasn’t getting more expensive, I wouldn’t like it.”

To a “value” guy or gal who wasn’t long the obvious intermediate-term @Hedgeye TRENDs of US GDP, Profit, or Capex #GrowthAccelerating, my comment must sound irrational. Using my rate of change process, it’s perfectly rational.

If “expensive growth” asset allocations, style factors, and market exposures weren’t getting more expensive, Mr. Market wouldn’t be confirming my data dependent view. (*Hint: when “growth” multiples compress and crash, growth is slowing)

Btw, I have no problem buying value and shorting growth. I’ll let you know when we start making that call.

Another way to measure and map real-world market expectations (instead of Econ 101 “rational” ones) is to look at the net positioning of all non-commercial CFTC futures and options positions.

In terms of the latest net LONG and SHORT positioning, here’s what the crowd really #Likes (and doesn’t like):


  1. Crude Oil’s net LONG position is +621,717 contracts = +2.31x on a 1yr z-score
  2. Cocoa’s net LONG position is +19,134 contracts = +2.81x on a 1yr z-score


  1. Japanes Yen’s net SHORT position is -140,151 contracts = -2.16x on a 1yr z-score
  2. Swiss Franc’s net SHORT position is -28,540 contracts = -2.01x on a 1yr z-score

Whether you consider it “rational” to buy Oil AFTER it goes up +16% in 3 months is going to be your opinion. A fact born out of explicitly BULLISH expectations on Oil is UST 2yr Yields breaking out to fresh YTD highs of 1.77% on reflation expectations.

I was probably lucky measuring and mapping Mr. Market’s signals, across durations, when I signaled BUY Cocoa (NIB) in Real-Time Alerts before this consensus ramp to what I call immediate-term #overbought. But I’d rather be lucky than “super smart.”

As you can see, whether you personally consider all of this rational or irrational is of no concern to Mr. Market. He has no idea who you are. And he doesn’t care about your super-smart position.

Did you get lucky and short US Equity Volatility at last week’s highs?

Or were you simply letting the market be smarter than you’ll ever be and signal to you that:

A) US Equity Volatility (VIX) was still Bearish TREND @Hedgeye
B) Front-month VIX ramped to a lower-high vs. the recent AUG 2017 lower-high
C) Front-month VIX still has immediate-term downside in the @Hedgeye Risk Range to 9.42 

Since US Equity Volatility just crashed (dropping -27% from last Wednesday morning’s US stock market open to yesterday’s close) whether you think it “made sense” or not, buying-the-damn-dip was the right call (again).

Most things make more “sense” looking backwards at the facts. For the Nasdaq in particular:

  1. There was a massive implied volatility PREMIUM vs. 30-day realized last week (now that’s fallen to only +8%)… and
  2. The net LONG position dropped another -1,882 contracts +28,543 contracts = -1.55x on a 1-year z-score

From an expectations and positioning perspective, those are 2 aces for the bulls who were buying that dip. Now, of course, AFTER the Nasdaq ripped back to a fresh all-time high last Thursday, the net LONG position expands and the volatility premium comes in.

Freak out, hedge, and sell low…. then buy, cover, and chase higher. That’s both rational and predictable behavior (of growth bears) inasmuch as it’s been rational for growth bulls to capitalize on it.

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.30-2.42% (bullish)
SPX 2 (bullish)
NASDAQ 6 (bullish)
VIX 9.42-13.08 (bearish)
YEN 111.89-114.39 (bearish)
Oil (WTI) 55.04-57.83 (bullish) 

Best of luck out there today,

Keith R. McCullough
Chief Executive Officer

Predicting Bull & Bear Behavior - 11.21.17 EL Chart