“Smooth shapes are very rare in the wild but extremely important in the ivory tower and the factory.”
-Benoit Mandelbrot
Ever have a boss or a dude with a “smoothing mechanism” on Old Wall TV tell you that something looks good because it’s trading above it’s moving average? Per our friends at Investopedia, a simple moving average “is an arithmetic moving average calculated by adding recent closing prices and then dividing that by the number of time periods in the calculation average.”
Isn’t that so smooth and attractive? Other than confirmation biases, what does something trading above or below its moving average indicate? Does it back-test as relevant using a ROC (rate of change) 4 Quadrant Economic Model at The Cycle turns?
Yeah, I lost both Euclidean Geometrists and Technical types with that last question. No worries. It’s all in good fun. It was fun to believe that being “long China, Europe, and EM” at this time last year looked good on “the charts.” Wasn’t it super cool and fun to buy into charts of US stocks and high yield bonds with the moving averages looking awesome back in AUG and SEP of 2018 too?
Back to the Global Macro Grind…
For those of you who don’t know that I don’t do smooth lines and one-dimensional curves when I model Global Macro market risk, now you know.
That said, there’s a lot of behavioral information in what the Old Wall (and its bought and paid for media) wants to believe about linearity, market multiples, etc… and we want to have a process to be aware of that.
While it seems like forever ago when the economic and earnings cycle data mattered to the market (remember APPL pre-announced?) all the way back in January of this year, most of the aforementioned Moving Monkeys were “broken.”
Now they’re not, “so” it’s all good. But looking back at the week CFTC futures and options net positioning data:
- The net SHORT position in the SP500 (Index + Emini) got -57,381 contracts shorter to a position of -24,043 contracts
- That scored -3.5x on a 1-year z-score which was easily the most bearish consensus positioning we’ve seen in 3 years
“So”, you idiot Mucker, why did you short SPY on the January bounce?
- I didn’t get that data point until last week… because
- Government Shutdown didn’t release non-commercial CFTC net positioning data in real-time
In other words, I was either blind or ignorant to information that is critical to my market-timing (risk management) #process… and that’s not an excuse – it just is what it is at this point, i.e. another life-lesson learned.
Unfortunately we won’t have this consensus market positioning data updated and current for a few more weeks. I’ll look forward to receiving that data in real-time and sending our Institutional clients my Sunday email that recaps what I make of it.
What else did I get wrong in the last month?
- I wasn’t Bearish Enough on the incoming US economic data
- I wasn’t Bearish Enough on the incoming Global economic data
Yep. You read that right. Even though we were the only independent research firm to time both the Global Growth and US Growth #slowing pivots from their respective cycle peaks perfectly, we weren’t calling for the DEC-FEB data to be as bad as it has been!
Oh, right, I know… all that Quad 4 in Q4 #slowing data was “priced in” on DEC 24th, even though Wall Street’s biggest net SHORT position in SPY wasn’t until JAN 29th. Got it. “So” here’s some fresh new FEB data for you this morning:
- JAPAN: PMI #slowed to 47.6 in FEB vs. 50.3 in JAN
- AUSTRALIA: PMI #slowed to 49.7 in FEB vs. 51.3 in JAN
- GERMANY: PMI #slowed to 47.6 in FEB vs. 49.7 in JAN
Again, I know, I know. Why callout the #3 (Japan) and #4 (Germany) economies in the world when we can all focus on the #1 and #2 countries having some super awesome MOU on the greatest deal ever that will smooth the Global Economic slowdown?
Right. Then there’s the Fed, ECB, and PBOC who are going to provide so much centrally planned #cowbell (in reaction to the ongoing #GlobalSlowing) that you just have to “buy stocks.”
I’ve actually had no problem with buying stocks or bonds for the last 6 months…
They may not be the “stocks” everyone was long back in SEP when “the charts looked good.” Remember, we started buying Housing Stocks (ITB), Utes (XLU) and REITS (VNQ) when the charts we’re “broken”…
And I was buying Treasury Bonds when the moving averages were clearly “broken”…
But that’s because my intermediate to long-term investment and risk management process doesn’t start or end with the assumption that the future economic outcome or market return profile will be driven by a backward looking smooth line.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.60-2.71% (bearish)
UST 2yr Yield 2.43-2.54% (bearish)
SPX 2 (neutral)
NASDAQ 7 (neutral)
Utilities (XLU) 54.70-56.49 (bullish)
REITS (VNQ) 82.62-85.44 (bullish)
Housing (ITB) 33.18-36.12 (bullish)
Shanghai Comp 2 (bearish)
Nikkei 202 (bearish)
DAX 108 (bearish)
VIX 13.05-18.77 (neutral)
USD 95.84-97.25 (bullish)
EUR/USD 1.11-1.14 (bearish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
