Sell The Bounce

“My biggest threat is the Fed.”
-Donald Trump 

Actually, it’s Quad 4.

Back to the Global Macro Grind… 

If you missed “doing enough” to your portfolio before the 1^st wave of Quad 4 in Q4 hit, here’s your 2^nd big chance to sell Momentum, High Beta, and Tech (and/or the Russell Growth, IWF) on the bounce. 

Ironically enough, if we continue to be right on Quad 4, Trump is going to be telling a partial truth. Most of the time that a central bank tightens into a slow-down, bad things happen to markets. 

*See the European Central Bank tightening (or now “tapering”) into their 2008, 2011, and 2018 slow-downs for details 

How do I think about timing more US Equity sales? 

A) It would be better if the SP500 was up again today, because the top-end of the @Hedgeye Risk Range is 2857
B) The best time to make sales is when volatility is at the low-end of the range in conjunction with SPY at its top end 

From a sentiment and positioning perspective, the setup to make sales at lower-highs is excellent: 

A) SENTIMENT: implied volatility on the SP500 just got smoked to a -9% DISCOUNT vs. 30-day realized
B) POSITIONING: last week’s net LONG position in SPX Index + Emini contracts was one of the biggest in 3 years 

At the Sector Style level, the anatomy of yesterday’s bounce (2^nd up day for the SP500 in the last 9) was great too: 

A) Tech (XLK) led gainers with a +3.0% bounce to -4.7% MTD
B) Communications (XLC) was a close 2^nd with a +2.6% bounce to -3.2% MTD 

Since I didn’t come into yesterday short either of those Factor Exposures, the higher the bounce the better! 

While it may sound somewhat foreign to some long-onlys, as a professional short seller, there’s nothing better than selling opportunities at the top-end of the range within Bearish @Hedgeye TRENDs. “Professional”, ha. I always want to write that. Thanks for allowing me to entertain myself! 

What else is giving me what everyone in this business craves (“conviction”) in selling the bounce this morning? 

A) Global Growth continues to #slow (a 10 month old story)
B) Headline Inflation continues to #slow from its recent cycle peak 

On those ROC (rate of change) fronts, here are some important callouts from my measuring and mapping #process this morning: 

1. Chinese stocks (Shanghai Comp) only bounced +0.6% overnight and remain in #crash mode at -28% since JAN
2. India’s stock market continues to get smoked by Quad 4 in Q4, down another -1.1% overnight and -10.6% since late AUG
3. Germany’s stock market is down again after making another lower-high (DAX down -13.7% since JAN)
4. Greece’s stock market continues to #crash, down -27.5% since… drumroll… JAN
5. EM Equity, Credit, and Currency Shorts like Argentina, Turkey, South Africa, etc. still look great
6. The CRB Index (19 commodities) is signaling lower-highs with a Bearish @Hedgeye TREND
7. Oil (WTI) is signaling its 1^st lower-highs in months (aiding and abetting our view on headline inflation #slowing in Q4)
8. The Swiss 10yr Yield has corrected back to 0.00% (proxy for slower-for-longer on Global Inflation expectations)
9. The UST 10yr Yield is dead flat at 3.17% after Bond Bears made a lot of noise up at the top-end of the range (i.e. 3.25%)
10. #StrongDollar continues to manifest, up again vs. the Euro and Pound this morning – looking great vs. EM Currencies too 

Can rates back up again today on hawkish “Fed Minutes”? Sure, but that’s commentary on yesterday’s news. Tomorrow’s “news” will be summarized as some version of some of the aforementioned 10 things. If those things change, I reserve the right to change too. 

Can the SP500 drop -4.1% from here in a straight line? Sure. That’s just the low-end of the @Hedgeye Risk Range which is implying that volatility (front-month VIX) rips right back to 27 on that kind of a move. 

Can your personal stock picks (maybe a little NFLX long vs. a lot of IBM short this morning?) augment the alpha you’re generating with Quad 4 positioning? Big time. Instead of trying to scare you like Zero Edge does for ad revs, I’m trying to help you. 

Two dirty words on the Old Wall (market-timing) are a part of that. 

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

UST 10yr Yield 2.99-3.25% (bullish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 52.40-54.66 (bullish)
REITS (VNQ) 75.06-80.39 (neutral)
Industrials (XLI) 71.70-76.99 (bearish)
Shanghai Comp 2 (bearish)
DAX 118 (bearish)
VIX 14.22-27.19 (bullish)
USD 94.50-95.75 (bullish)
EUR/USD 1.14-1.16 (bearish)
YEN 111.27-114.75 (bearish)
GBP/USD 1.30-1.33 (bearish)
Oil (WTI) 70.03-75.92 (bullish)
Copper 2.74-2.83 (bearish) 

Best of luck out there today,

KM 

Keith R. McCullough
Chief Executive Officer