“A great decision is the result of a good process.”
-Annie Duke
I didn’t pay Annie to write that. “What makes a decision great is not that it has a great outcome…” In markets, to make good decisions over a long period of time, it’s all about your decision making process.
“That process must include an attempt to accurately represent our own state of knowledge. That state of knowledge, in turn, is some variation of ‘I’m not sure’… and that doesn’t mean there’s no objective truth.” (Thinking In Bets, pg 27).
My state of knowledge gets updated with new information every market day. I get new economic data points and I get new market signals. Every day is the best day to use that information to improve my positioning.
Back to the Global Macro Grind…
Yesterday there was no new economic information that changed our 1.26% nowcast for Q1 headline US GDP. But there were new market signals. Both the SP500 and UST 10yr Yield signaled immediate-term #oversold.
What does immediate-term TRADE #oversold mean?
- Unlike @Hedgeye TRENDs (3 months or more), TRADEs are 3 weeks or less in duration
- When something is signaling #oversold on my TRADE duration I either buy or cover
If you’d prefer to think in bets, when you’re playing Blackjack do you hit on a 6? Good. I don’t either. I also don’t short stocks after the stock market has gone straight down and is signaling immediate-term TRADE #oversold on red.
Most of my decision making process has to do with awareness. Are you aware that the SP500 was down for the 13th day in the last 19 trading days yesterday? Are you aware that the VIX was signaling immediate-term TRADE #overbought?
Are you aware that Friday is both month and quarter end and what a month-end #markup is?
Looking at the implied volatility of the market (after the selloff) are you aware that:
- SPY’s implied volatility vs. 30-day realized has ramped back up to a +31% PREMIUM?
- Utilities (XLU) implied volatility vs. 30-day realized has ripped to a +65% PREMIUM?
- Gold’s (GLD) implied volatility vs. 30-day realized sold off to a -15% DISCOUNT?
That’s right, the beauty of having asymmetry in your long/short portfolio is that not everything is signaling the same thing at the same time. Gold was signaling the opposite of the SPY (SP500) yesterday:
- Gold (GLD) was +0.8% on the day at the top-end of the @Hedgeye Risk Range
- When anything is at the top-end of my risk range it’s signaling immediate-term TRADE #overbought
So I sold some of my Gold and Gold Miners (so that I can buy more next time they’re at the low-end of my risk range) yesterday and bought more Energy (XLE) because it, like SPY, was signaling immediate-term #oversold.
To be clear, every incremental bet I make isn’t going to be right. But when I am right (like I am this morning with SPY up and GLD down pre-open), I know why I’m right. It’s not luck.
Some Institutional Investors look at me side-ways when I start explaining my decision making process in implied volatility terms. I get why. When someone is explaining something new to me, I don’t always get it right away either.
The point isn’t for everyone to agree with your decision making process – it’s for you to be able to explain your process.
Back to the Blackjack example:
- Why don’t you hit on 6s when the dealer is showing a face card?
- Why do you split a pair of 8s?
And in the Hedgeye Process example:
- Why do you buy Energy (XLE) and not the Financials (XLF) in #Quad3?
- Why do you buy on #oversold signals on red instead of chasing markets higher on green?
Again, I’m not going to be right on every decision I make. But my decision making process is both repeatable and rules-based. It’s also ready to be refined and improved upon whenever I have an opportunity to learn from my mistakes.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.40-2.61% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
Utilities (XLU) 56.90-58.93 (bullish)
Energy (XLE) 64.16-67.63 (bullish)
Financials (XLF) 24.90-26.20 (bearish)
VIX 13.09-17.23 (bearish)
USD 95.03-96.75 (neutral)
Oil (WTI) 57.17-60.48 (bullish)
Gold 1 (bullish)
Copper 2.81-2.92 (neutral)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
