“The interactions matter more than the nature of the units.”
-Nassim Taleb 

In one clean and concise sentence, Taleb summarizes why we measure and map economies within our rate of change 4 Quadrant framework. Our #process is fractal.

As Taleb goes on to explain, “The main idea behind complex systems is that the ensemble behaves in ways not predicted by its components. Studying individual ants will almost never give us a clear indication of how the ant colony operates…”

“For that, one needs to understand an ant colony as an ant colony… not a collection of ants. This is called an emergent property of the whole, by which parts and whole differ because what matters are the interactions between such parts.” (Skin In The Game, pg 69)

#Overbought or New Bull Market? - ants

Back to the Global Macro Grind…

Did you feel like an ant marching to lower-highs into yesterday’s US stock market close? Why did you feel anything? That’s simple – you’re human. Like me, you need a risk management #process for your individual feelings.

Is the SP500 going to signal overbought @Hedgeye today or is this a new bull market?

A: #overbought

This isn’t a new bull market. It’s an old one. All we’re doing here is trying to get back to where we went.

Having already been on the right side of going to those all-time SPY highs, I don’t lose much sleep on making up Macro Tourist narratives on why everything that’s happened since JAN 2018’s record 2872 SPX close doesn’t matter.

Sequencing components of why the SP500 had a +1.0% up day yesterday is, as always, part of the deliberate study #process:

  1. Oil ripped to fresh YTD highs on Trump’s Iran news
  2. Energy Stocks ramped (as they should in Quad 3) alongside late-cycle inflation expectations
  3. Bond Yields re-tested their YTD highs
  4. Financials (XLF) led gainers with a +1.5% day taking them back into the black at +0.5% YTD
  5. Tech (specifically FAANG components) raced higher as the performance chase rarely leaves them behind
  6. Equity Volatility (VIX) sold off to the low-end of the @Hedgeye Risk Range

And Voila. No matter where you go this morning, here we are… knocking on a lower-high’s door vs the April 2018 SP500 closing price of 2708. So now what? Well, just using the signaling #process as opposed to what I “feel” about that:

  1. Oil (WTI) signals immediate-term TRADE #Overbought just inside of $72/barrel
  2. Energy Stocks (XLE and XOP) signaled immediate-term #Overbought into yesterday’s close
  3. Bond Yields (both UST 2 and 10yr Yields) were within a basis point of the top-end of the @Hedgeye Risk Range yesterday
  4. Financials (XLF) look just like SPY, signaling immediate-term #overbought +0.4% higher than yesterday’s close
  5. Tech (XLK) will signal immediate-term #overbought at $69.59 or higher – we’ll see if we see those prices today
  6. The volatility of volatility (VIX Risk Range) = 13.21-17.87

Therefore, using the colony of factors (there are many more than the 6 I’m highlighting) in my risk management system and how they interact, the “call” this morning is that the stock market is simply #overbought.

How do you feel about all of this? Do your feelings matter in my model? Actually, they do. I don’t care so much about what people say about the market as I do how they are positioned in the market.

Before this bounce to lower-highs, the net LONG position in the SP500 (non-commercial CFTC futures and options) was:

  1. Net LONG +208,496 contracts
  2. That net LONG position was UP +13,005 contracts week-over-week and…
  3. Registered +1.6x on a 1-year z-score relative to its 1-year average net LONG position of +121,591

Considering all that’s happened in the last year (including a RECORD 7 consecutive quarters of #accelerating y/y US GDP growth) , that’s a big net LONG position. But, as a potential short seller of SPY this morning, what I’d love to see is the biggest NET long position!

Another glaringly obvious fact this morning is that implied VOLATILITY for the SP500 is trading at a -32% DISCOUNT to what’s been realized (in volatility terms) in the last 30-days. That’s not only complacent, that’s capitulatory.

Got capitulation? We didn’t have you short Tech (we moved it from our favorite Sector LONG to #3 with Energy moving to #1), but plenty of hedge funds did (lower). Moreover, they dog-piled onto that FACTOR exposure at FAANG’s April lows.

All the while, Tech Earnings Season has marched on with #GrowthAccelerating to +29% aggregate year-over-year Tech earnings growth with 53 of the 68 “Tech” companies in the SP500 having reported.

The problem with that Earnings Catalyst is that Earnings Season is almost over. With 89% of the companies in the SP500 having reported aggregate year-over-year EPS growth of +23.8%, it was a late-cycle EPS #acceleration season, indeed.

If that’s the only factor you care to look at, you may very well believe it’s a new bull market. That’s cool. Differences of opinion is what makes a market. For me, that’s a good old bull though…. Instead of buying the damn dips at this time last year, I’m selling the rips.

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

UST 10yr Yield 2.93-3.02% (bullish)
SPX 2 (bearish)
NASDAQ 6 (bearish)
Energy (XLE) 74.01-76.31 (bullish)
Industrials (XLI) 70.55-74.40 (bearish)
Nikkei 22000-22638 (bullish)
VIX 13.21-17.87 (bullish)
USD 91.29-93.39 (bullish)
Oil (WTI) 67.54-71.85 (bullish) 

Best of luck out there today,
KM 

Keith R. McCullough
Chief Executive Officer

#Overbought or New Bull Market? - U.S. GIP Model