“Metabolism is the fire of life.”
-Geoffrey West 

You probably wouldn’t believe the number of times I’ve been asked that question (Was That The Bottom?) since the US stock market joined Asian, European, and Emerging Market ones careening to the downside in October. 

If I didn’t have a process to measure and map what Economic Quad any of these parts of the world are in AND their respective rates of change in market price/volume/volatility, where would I begin to answer THE question? 

To me, the volatility of a market price is like the metabolism of a human being. “You could not walk, think or even sleep without being supplied by metabolic energy… Metabolic rate is the fundamental rate of biology.” (Scale, pg 88)

Was That THE Bottom? - 12.10.2018 reindeer cartoon

Back to the Global Macro Grind…

But that’s just me. Here are some of the bigger buckets of things other people think matter more to a market: 

  1. The simple moving average of a market price (1-factor model, instead of Multi-factor)
  2. The “level” of growth and/or inflation in an economy (instead of the Rate of Change)
  3. The “valuation” of a market (without an accurate view on The Cycle of earnings) 

I’m obviously not going to dismiss how other people think. To the contrary, I think understanding how other people think about the market is critical in contextualizing the opportunity in taking a contrarian position. 

Let’s use the 2018 currency market as an example. 

Since calling out a -50% crash in an Emerging Market currency like the Argentine Peso (and their subsequent begging for a bailout from the IMF in EARLY 2018) is too easy to explain, let’s do the British Pound:

  1. Coming out of Q4 2017’s #PeakCycle UK inflation readings, the BOE was hawkish
  2. As we’ve rolled through 2018, the UK economy has slowed into #Quad4
  3. The British Pound has been an awesome short against our #StrongDollar call since April 

That’s right. I didn’t mention anyone’s political thoughts about Brexit, did I? Where do I think the Pound bottoms? Well, that’s pretty straightforward – when the rate of change of the UK economy stops slowing and comes out of Quad 4.

Yesterday’s Industrial Production print in the UK was horrendous at -0.8% year-over-year growth. Do you think the #slowing UK economy has affected the political prospects of Teresa May? Of course it has. 

How about Germany?

  1. Coming out of Q4 2017, Germany’s y/y #PeakCycle GDP growth rate was in the 94th percentile of historical readings
  2. As we’ve rolled through 2018, Germany’s economy hit Quads 4 (in Q1) and Quad 3
  3. German stocks crashed (DAX down -21% since JAN) and the Euro has been a great short vs. #StrongDollar too 

Did you think the #slowing German economy affected the political prospects of Angela Merkel? Of course it did. Why did shorting both European Stocks and the Euro work? Because Old Wall consensus was long them into the slow-down! 

Not surprisingly, my point this morning is about process. You could have been trying to call “bottoms” in European stock markets for at least a year now and lost a lot of money doing so. 

You’ll note that as their Moving Monkeys broke, consensus stopped calling European Stocks “cheap.” You’re obviously hearing less and less Portfolio Managers talk up how bullish they are on the level of European economic growth this year too.

BREAKING: The ROC (Rate of Change) is THE leading indicator for subsequent levels 

Back to the USA… since, there is no economic data and/or multi-factor market signal for me to make a call that the US stock market has “bottomed”, why would I make a call on that or Santa Claus rallies for that matter? 

That doesn’t mean that yesterday’s intraday lows didn’t signal a short-term bottom. 

Since the SP500 hit the low-end of my @Hedgeye Risk Range, my process says that’s as good a place as any to cover shorts on red so that you can re-short the bounce. 

Was it THE bottom though? Call one of the Old Wall strategists who didn’t call the topping process for US stocks in September of 2018 for that answer. I’m sure they’ll give you an answer if you give them a brokered commission.

UST 10yr Yield 2.79-3.03% (bearish)
SPX 2 (bearish)
Utilities (XLU) 54.05-57.25 (bullish)
DAX 108 (bearish)
VIX 16.62-25.08 (bullish)
USD 96.25-97.52 (bullish)
EUR/USD 1.11-1.14 (bearish)
GBP/USD 1.25-1.28 (bearish)
Oil (WTI) 49.64-53.62 (bearish)
Gold 1211-1262 (bullish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Was That THE Bottom? - 12.11.18 EL Chart