“Great theories are often humbled by mere facts.”
-Benoit Mandelbrot
Anytime the US stock market goes all fractal on the Legacy 2017 US Growth Bears, I’m going to have to bring out The Brot! Yep. Of all the economic and market theorists I’ve studied, Benoit Mandelbrot is the most practical. He’s got great quotes too.
Instead of letting them think inside the establishment’s linear, ideological, and political box this year, gift your friends the gift of knowledge and remind them that there’s a better way. In markets, non-linear scaling and power laws appear frequently.
Citing Hurst’s Law to make the connection between hydrological and market cycles, Mandelbrot explained that Hurst “revealed that his point had not been the size of the variations, but the precise sequence of them.” (The (mis)Behavior of Markets, pg 181)
Back to the Global Macro Grind…
That’s right. Both the timing and sequencing of market moves matter, big time. That’s why it’s so critical to not be a Macro Tourist, jumping flippantly from ‘aha chart’ to chart that people send you.
No, this isn’t easy. You need the discipline and focus to measure and map market moves, daily. All the while you should be asking yourself, what is driving the size of market moves? What was the sequence of data points and/or events that preceded them?
Let’s look at what drove yesterday’s freshly squeezed all-time closing high in the Nasdaq. Per the tourists who sold and/or hedged at every higher-low, Tech was in some kind of a “correction mode” for the better part of DEC 2017.
From our measuring and mapping #process’ perspective, that’s fake news. This is what actually happened:
- The Nasdaq sold off to the low-end of the @Hedgeye Risk Range on DEC 31
- The Net LONG position in the Nasdaq collapsed to only +3,302 contracts by 2017 year-end
- The Nasdaq went from having an implied volatility DISCOUNT of -5% to a +26% PREMIUM into DEC 31
Three more points on what those three points mean:
- Raging bull markets always sell-off to the low-end of their respective @Hedgeye Risk Ranges
- When a bull market corrects, you should be buying the damn-dip, not selling it
- 30-day implied volatility DISCOUNTS = complacency & capitulation, that’s when you make sales
More specifically, you make sales when:
A) A market price is at the top-end of the @Hedgeye Risk Range and
B) Implied volatility PREMIUMS collapse into DISCOUNTS and …
C) Macro Tourists capitulate and chase high, getting net longer AFTER the move
You don’t like buying markets after they register all-time highs? I don’t either. That’s not what my real-time risk management #process is suggesting you do. It’s actually allowing you to sell the rips after buying those damn dips, dammit!
Since way too many people missed capitalizing on obvious rate of change #Accelerations in both real US Growth and Corporate Profits in 2017, I’m going to try to get a little more aggressive in my coaching style this year.
Everyone on Wall Street may not want to admit to needing one, but we all need coaches. Just like you all need to be better players and coaches, I need to get better at this every day too. We’re in this together. I appreciate you all helping me.
Back to the point I made on Nasdaq positioning… per the latest non-commercial CFTC (futures & options) positioning report we produce weekly (send me an email if you’d like to get that directly) here are the major callouts:
- Nasdaq’s net LONG position of only +3,302 contracts scores -1.82x on a 1-year z-score
- Aussie Dollar’s net SHORT position of -11,773 contracts scores -1.93x on a 1-year z-score
- Nikkei’s net LONG position of only +1,508 contracts scores -2.33x on a 1-year z-score
- Natural Gas’ net SHORT position of -172,737 contracts scores -2.65x on a 1-year z-score
- Crude Oil’s net LONG position of +679,047 contracts scores +2.30x on a 1-year z-score
As a reminder, as a matter of #process, we use z-scores to measure and map the positioning of bulls/bears relative to their prior positioning. As opposed to qualitative Old Wall theories about how “bullish” or “bearish” people are, these are mere facts.
And the fact of the matter is that prior to yesterday’s short-squeeze of +1.5% in the Nasdaq Composite Index (great start to the year, btw!), consensus market positioning was way too bearish.
Bearish positioning in the “expensive” part of this bull market has perpetuated the bull market. If you have friends who are unaware of the sequencing of these price, volatility, and positioning facts, they can be humbling, indeed.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.38-2.52% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
Biotech (IBB) 106-111 (bullish)
XOP 35.90-38.98 (bullish)
Nikkei 227 (bullish)
VIX 9.14-10.96 (bearish)
USD 91.25-93.01 (bearish)
Oil (WTI) 57.07-61.31 (bullish)
Nat Gas 2.52-3.09 (neutral)
Copper 3.14-3.34 (bullish)
AAPL 168.09-177.36 (bullish)
AMZN 1162-1197 (bullish)
FB 175-183 (bullish)
GOOGL 1050-1088 (bullish)
NFLX 190-203 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
