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“Like tourists huffing and puffing to reach the peak, we forget the view on the way up.”
-Nietzsche 

So it was Nietzsche who came up with the term Macro Tourists! I knew it had to be someone smart. I hear he hung out with some of the polymaths who did Rate Of Change back in the day too.

Do you have friends or competitors who are huffing and puffing about politics, trying to make every macro market headline THE confirmation of an investment bias?

Or are you increasingly spending your time with who we call the Data Dependents? You know… the locals and the bean counters who are very much aware of not only where each data point is (on a sine curve) when it is reported, but where it came from?

Risk Managing Peaks - 04.27.2018 peak now what cartoon

Back to the Global Macro Grind…

Darius Dale and I spent all of yesterday in Kansas City, MS meeting with Institutional Investors who are as into bean counting ROC (rate of change) data as they are into tabulating KC Chiefs Fantasy Football stats. It was a great day of macro debate!

And, with a European Equity market like Italy resuming its crash this morning, it’ll be another great day for #Quad4 Global Macro Risk Management. As we’ve been highlighting, the recent European economic data looks just like its stock market declines do:

  1. Italy’s MIB Index down another -0.9% this morning taking its crash to -22.1% since May of 2018
  2. Spain’s IBEX down another -0.9% this morning moving it back into crash mode at -20.0% since May of 2017

That’s right. Looking backwards, the ROC (rate of change) data that pinned Spain’s #PeakCycle growth and inflation expectations goes all the way back to when Barron’s published a cover story in the summer of 2017 titled “BUY EUROPE.”

Hopefully you don’t have friends who did that.

Risk Managing Peaks starts with not chasing them. Getting out when your GIP Map says you’re exiting Quad 1 or Quad 2 is the 1st part of not having a major draw-down into the depths of a valley “valuation” storytelling…

Not buying the damn dips is the 2nd part. Because… the first 5-10% drop from a peak isn’t a dip!

So what if the #PeakCycle growth and inflation expectations (Quad 2) embedded in major US Equity Indices like the NASDAQ and Russell 2000 in late AUG of 2018 were peaks?

  1. NASDAQ’s current -9.7% draw-down isn’t a dip
  2. Russell 2000’s current -11.1% draw-down isn’t a dip

As you can see in today’s Chart of The Day (slide 64 in our current Q4 Macro Themes deck), the Q3 of 2018 Peak wasn’t just any other peak. It was an epic 9th consecutive quarter of year-over- year US GDP #GrowthAccelerating that:

  1. Came from a ROC (rate of change) Bottom level US Economic Growth in Q2 of 2016… and
  2. Perpetuated massive alpha doggie returns for anyone long either Growth or Tech as Factor Exposures

Some PMs went out of business shorting that 2.5-3 year move in what they called “overvalued growth stocks”…

Some timed it better than others and are crushing it as of SEP 2018. Some will cover their shorts too early and not make nearly as much as they might if they just wait for the measuring and mapping process to signal a change to pro-growth Quads again.

And … some don’t even know what the Quads were, where they’ve come from, and/or where each incremental growth and inflation data point suggests the Quads are going from here.

On the recent bounce to lower-highs, some actually just got a heck of a lot longer than they were before the SP500 had its first -10% drop from the peak. Here’s some actual sentiment and positioning data on that front:

  1. The latest net LONG position (non-commercial CFTC futures/options data) in SP500 (Index + E-mini) = +248,269 contracts
  2. That net LONG position was UP +26,857 contracts week-over-week registering a 1-year z-score of +2.0x
  3. The MAX net LONG position in the last 3 years for the SP500 is +249,638

Indeed, the last time I went max net long US Equity Momentum, High Beta, and Growth was when dips were to be bought. And, again, I don’t think this recent draw-down was a dip.

Consensus does though. Another data point to consider this morning is that IMPLIED VOLATILITY (vs. 30-day realized) on the SP500 just tanked to a -16% DISCOUNT. For Tech (XLK) that DISCOUNT (on the same duration) is -24% this morning!

If you don’t know how to use derivatives markets to help you gauge sentiment and positioning, we can help you with that. That’s why we do so many face to face meetings with Institutional Investors who are constantly looking to learn and evolve.

Teaching people how to risk manage cyclical peaks should be done by people who have a tested and tried process of getting from tops to bottoms successfully. If you’d like the alternative, turn the TV off mute today and listen to some tourists huff and puff.

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

UST 10yr Yield 3.03-3.22% (bullish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
Utilities (XLU) 52.66-55.26 (bullish)
Shanghai Comp 2 (bearish)
VIX 17.81-26.95 (bullish)
USD 95.60-97.11 (bullish)
Oil (WTI) 62.02-68.07 (bearish)
Gold 1 (bullish)
Copper 2.64-2.82 (bearish)
AAPL 195.08-212.04 (bearish) 

Best of luck out there today,
KM

Keith R. McCullough
Chief Executive Officer

Risk Managing Peaks - 11.06.18  EL Chart