“After teaching me counting, my father’s next project for me was reading.”
-Edward Thorpe
You’re either frustrated with the futures this morning, or you are crushing it. After the 3rd Best Selling Opportunity since September, your performance today will be determined by the decisions you made on Monday’s rally to lower-highs.
Instead of opining on the politics of what you think “could” or “should” be making the market go up and down, I highly encourage you to go back to the basics of counting what both the data and markets are actually doing.
If, like Ed Thorpe, you have a repeatable and data driven process, I don’t have to encourage you to do that. Why? Because that’s what you do. No matter what the newsy headline of the day, the data trumps all of the tweets and noise. That’s your edge.
Back to the Global Macro Grind…
Almost everything that is happening in Global Macro markets this morning can be explained by two words: Quad Four. Yep, instead of all the super smart theories out there, that’s all you really need to know.
Think about that for another few minutes…
Two words. That is basically all you needed to know to beat not only the market but your competition in 2018. Importantly, you had to know when 1 of the 2 words changed. That’s when we went from Quad Two to Quad Four (in Q4).
Yes, I am spelling out the 2 and the 4 this morning in an attempt to be creative. When my process and “call” on markets doesn’t change, I hope you can empathize with the reality that I run out of ways to say the same thing.
As a refresher for those of you who are new to our Global Macro Risk Management bean counting process:
- Quad 1 = real GROWTH accelerating as INFLATION is slowing
- Quad 2 = both GROWTH and INFLATION accelerating at the same time
- Quad 3 = real GROWTH slowing as INFLATION is accelerating
- Quad 4 = both GROWTH and INFLATION slowing at the same time
There’s a ton of measuring and mapping that goes into getting to what Quad we’re in. As opposed to the obvious ignorance most Macro Tourists talking on TV have, there’s an implicit awareness of economic history embedded in the process too.
Once you understand that GROWTH and INFLATION are the 2 most causal factors affecting market returns, you come to realize why only knowing the ROC of those 2 words matters more than any unique thought you might think you have in your head.
I don’t know about you, but the scariest thing I can do to my own money is think about what could or should happen in both the global economy and markets without having counted the numbers with my entire team counting at the same time.
I’m not alone. Ask Ed Thorpe how he’d probability-weight his blackjack bets without counting the cards as they appear.
Even if we weren’t in Quad 4, I still wouldn’t have bought stocks on either NOV 7th or DEC 3rd because:
A) Both times the SP500 was at the top-end of my @Hedgeye Risk Range and
B) Both times the implied volatility (vs. 30-day realized) for SPY was trading at a -36-37% DISCOUNT
One of the most critical components of a disciplined risk management process is having rules within your rules. However unique this might sound, one of the most basic rules I have is don’t chase.
Put simply, that means:
A) Don’t buy or cover at the top-end of the range and
B) Don’t sell or short at the low-end of the range
To use Thorpe’s blackjack example, if you don’t have a process to calculate the range (probabilities) of outcomes, you don’t have a process to begin with. If you can’t re-calculate for new information (dealer re-shuffles the deck), your process isn’t dynamic.
Prior to getting new PRICE, VOLUME, and VOLATILITY data when markets re-open for trading this morning, my process counts the SP500’s risk the following way:
- SP500 @Hedgeye Risk Range = 2
- Implying -3.6% immediate-term TRADE downside vs. +2.7% immediate-term TRADE upside
- With an implied volatility DISCOUNT (vs. 30-day realized) of -24% vs. -36% prior to Tuesday’s open
Again, playing The Game is all about awareness. If I don’t have a process to probability-weight my next move, why would I trust making any market moves never mind write to you about how I think about the market’s next move every day?
After I do all my counting, I go back to reading something that can teach me something new. That’s the only way I can think about new ways to evolve my process from what it has become. Thanks to Thorpe I learned a lot from him yesterday too.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.87-3.05% (bearish)
SPX 2 (bearish)
NASDAQ 6 (bearish)
Utilities (XLU) 54.01-56.61 (bullish)
Shanghai Comp 2 (bearish)
Nikkei 219 (bearish)
DAX 105 (bearish)
VIX 16.20-24.18 (bullish)
USD 96.06-97.44 (bullish)
EUR/USD 1.11-1.14 (bearish)
Oil (WTI) 49.09-54.71 (bearish)
Gold 1 (bullish)
Copper 2.68-2.89 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
