“I tend to stay with panic. I embrace the panic.”
-Larry David
In the immediate-term, I don’t tend to stay with panic. I call it a short covering opportunity.
What the US equity market has been doing for the last few weeks is what developing bear markets do. They bounce to lower-highs on #decelerating volume and then capitulate to lower-lows on #accelerating volume as consensus positioning panics.
Like all things macro, panic should be measured and mapped across multiple factors and in rate of change terms. Short covering opportunities aren’t “feel” calls. They aren’t certainties either. They’re based on probabilities.
Back to the Global Macro Grind…
Are immediate-term #oversold signals within Bearish @Hedgeye TRENDs the beginning of the next bull market?
Nope. The immediate-term #overbought signals in some of our favorite longs (US Dollar and Utilities) weren’t the end of their respective Bullish @Hedgeye TRENDs either.
For those who weren’t positioned for it, this is going to be hard to read, but from a Quad 4 LONG positioning perspective, yesterday was one of the best relative and absolute performance days of 2018:
- Long US Dollar = up day
- Long Short-term Treasuries = up day
- Long Long-term Treasuries = up day
- Long Utilities (XLU) = up day
- Long Consumer Staples (XLP) = up day
- Long REITs (XLRE) = up day
On the SHORT side, Quad 4 really worked well too:
- Short Momentum = up day
- Short High Beta = up day
- Short Tech (XLK) = up day
- Short Semis (SMH) = even bigger up day
- Short Communications (XLC) = up day
- Short Russell Growth (IWO) = up day
As you can see from slide 70 of our Q4 Macro Themes deck (presented 1-month ago), this is the Style Factor Exposure setup your portfolios should have right now. That won’t change because of yesterday. Your gross and net positioning should.
To put yesterday’s panic selling that registered an immediate-term TRADE #oversold signal in context:
A) It was the 13th down day for the SP500 in the last 15 trading days
B) It came after a -12.4% draw-down in the NASDAQ from its AUG 2018 all-time closing high
C) It came after a -15.6% draw-down in the Russell 2000 from its AUG 2018 all-time closing high
That means that if you allocated assets to the Russell 2000 (IWM) when the “chart looked great” back in AUG, you have to be up almost +19% from yesterday’s close to get back to break-even.
The other big mistake your friends could have made was shorting the Long Bond at 3.23% on the UST 10yr Yield. It sold off to 3.10% at yesterday’s lows, reminding everyone that there is a reflexivity associated with “risk on” and where money goes during a panic.
The way I have always thought about “risk” is not to be the guy losing a lot of money when everyone else is. Having a CNBC “Special” at 7PM that focusses on panic selling isn’t risk management. Again, it’s a short covering opportunity.
Now what?
Well, the SP500 could easily bounce +4-6% from yesterday’s close. That’s just the mathematical answer embedded in the @Hedgeye Risk Range. Today/tomorrow alone, you could easily see a +3.9% move back to another lower-high of 2760.
What could/would drive that?
- The last of the Q3 (i.e. Peak Cycle) US economic data being reported
A) Durable Goods and Capex for SEP 2018 is due out this morning
B) Q318 US GDP is due out on Friday morning - Undoing some of the short-term panic/capitulation
- Some “better than expected” earnings from oversold lows?
On that 1st catalyst, don’t forget how awesome the #PeakCycle numbers for the US economy were. If we’re right on a headline nowcast of +3.49% (which equates to +3.05% year-over-year real GDP growth):
A) That was a record 9th straight quarter of US GDP #accelerating on a year-over-year basis
B) That included a #PeakCycle year-over-year headline inflation (CPI) report of +2.9% in JULY
C) That delivered what Quad 2 always does, higher stock prices for Momentum & Growth… and higher interest rates
So right after panic peaked, you’ll get a nice Macro Tourist turnout on TV on Friday, reminiscing about everything that was yesterday’s news while hardly understanding what is being priced in as the first Quad 4 in Q4.
What if I’m wrong on any or all of that and we get another 3-hour bounce today and the US stock market heads towards crash mode (like Chinese, European, and EM markets already have)?
Well, that’s fine with me. I’m not telling you to get long the exposures that have taken us this low this fast. I’m just making a short-term call that those shorts are oversold and that you should cover some against that Quad 4 LONG book.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 3.01-3.21% (bullish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7011-7482 (bearish)
Utilities (XLU) 52.62-55.50 (bullish)
Industrials (XLI) 68.81-73.27 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 21105-22808 (bearish)
DAX 109 (bearish)
VIX 17.35-26.90 (bullish)
USD 94.55-96.42 (bullish)
EUR/USD 1.13-1.15 (bearish)
Oil (WTI) 65.63-69.59 (bearish)
Gold 1 (neutral)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
