“It is the anticipation of regret that affects decisions.”
-Danny Kahneman
“Tech is getting wrecked”… “man, see what they just did to Facebook?”… “Financials straight up and FAANG getting killed, dude!”
Darius Dale, Josh Balch, and I had the pleasure of being in Boston visiting Institutional Investors yesterday and, quoting The Donald, “believe me”… the regret of not making any sales at last week’s all-time highs for the Nasdaq was palpable.
Any time you’re making short-term decisions based on “your bench” and emotion, you should probably take a deep breath and review that A) you are human and B) you are not alone. As Kahneman taught us, most humans don’t make decisions “efficiently”, they seek to avoid losses.
Back to the Global Macro Grind…
I personally think people who chased Nasdaq, FAANG, etc. charts on this very morning of last week deserved to lose money. You can go back and read last week’s Early Look and/or just look at where the market was within the @Hedgeye Risk Range – both said sell-some.
To review some of the most basic rules of my market-timing and risk management #process:
A) At the top-end of the @Hedgeye Risk Range when the market has moved from a steep implied volatility PREMIUM to an implied volatility DISCOUNT = sell/short
B) At the low-end of the @Hedgeye Risk Range (after the market’s implied vol discount turns into a PREMIUM) = buy/cover
It was only 1-week ago today that the Nasdaq Composite Index:
A) Had the top-end of the @Hedgeye Risk Range at 6918 … and
B) An implied volatility DISCOUNT (vs. 30-day realized) of -4%
Within that setup, youge FAANG components like Amazon (AMZN) and Google (GOOGL) had implied volatility DISCOUNTS of -50% and -18%, respectively. If you don’t know what those mean, let me make it really simple – they combine complacency with capitulation!
Complacency? Big time. This usually happens AFTER prices ramp to all-time highs. Consensus isn’t willing to pay up for protection after realized volatility compresses (which perpetuate the all-time highs in price).
Capitulation is obvious. That’s where the weakest bears just can’t take the Pain Trade (which was higher) anymore and cover. That’s right – they cover right before these epic 2-3% “corrections”, not after.
In case you have friends experiencing short-term-rotational-performance-chasing-anxiety-disorder this morning, remind them that the latest “Tech Wreck” only has the Nasdaq down -2.0% from its all-time closing high of 6912.
“But KM, the Financials, man – this rotation is real.”
Well, this is what I have to say about that:
- If you’ve been long “Reflation” since Oil broke out in SEP, you were already long the Financials and didn’t have to rotate
- If you were a Macro Tourist whining about a “flat yield curve” and sold the Financials on that, you deserved to lose
Isn’t that awesome? The best time to re-load and buy the bank stocks was:
A) Throughout NOV when they kept tapping the low-end of the @Hedgeye Risk Range …
B) When it was as clear as the sun rising in the East that Reflation was driving the UST 2yr Yield to new highs (compressing the curve)
Yesterday alone the Financials (XLF) were up another +1.5% to +20.4% YTD! And you know what Macro Tourists are going to do next? They’re probably going to:
- Buy the Financials (XLF) at the top-end of the current @Hedgeye Risk Range right before the DEC rate hike… and
- Sell Tech (XLK) at the low-end of the @Hedgeye Risk Range
And so many in this profession wonder why “passive is taking share from active”… selling low after chasing high is no way to beat either an index and/or your competition. It’s a terribly emotional way to play the game.
Since I sold all my Tech and US Equity Beta longs in Real-Time Alerts before the latest emotional carnage, I’m looking forward to capitalizing on one of the many buying opportunities we’ve had in Tech (XLK) going back to this time last year.
Quad1 (which is where the US economy is headed in Q1 of 2018) loves Tech. Since Quad1 implies another Reflation Rollover (sequentially vs. Reflation’s SEP-DEC ramp), I’d be looking to book gains on the mid-DEC Fed Rate Hike “news” (they’ll be hawkish) in the Financials too.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.31-2.42% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
VIX 9.00-12.04 (bearish)
USD 92.50-94.03 (neutral)
Oil (WTI) 56.08-59.13 (bullish)
Gold 1 (bearish)
Copper 3.00-3.12 (neutral)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
