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“There never was a horse that couldn’t be rode; there never was a cowboy that couldn’t be throwed.”
-Lula Mae 

That’s a great risk management thought for stock pickers and market timers. If you don’t think you can do it, try, try, and try again. Long or short, I personally don’t care what side I’m riding. I just want to be on the right side. 

That’s also a quote Robert Coram uses in one my the best books I’ve read this year: Boyd The Fighter Pilot Who Changed The Art of War. On beating other cowboys in the sky, “if they went through Nellis in the 1950s, they knew there was someone better. And it still rankles.” 

“Then, too, most fighter pilots operated at the existing skill level. They never improved the state of their art and they never add anything to their profession. Boyd did both. He was never defeated. Some called him names. Others called him the best fighter pilot in the US Air Force. And they were right.” (pages 88-89) 

Back to the Global Macro Grind… 

If the US stock market opens where it’s indicated (lower), it should be a great day to be riding some of your favorite shorts. What a great ride our analyst Jay Van Sciver’s Tesla (TSLA) short has been this year!

Riding Shorts - z 06.07.2018 Tesla cartoon

In developing Bearish @Hedgeye TRENDs I learn the most by measuring and mapping the bounces. After this week’s 1-day bounce in US Equity Beta, this will be the 2nd down day in 3 and the 4th in 5. Again, good for your shorts. 

Good, if you’re aware of The Quads, that is… 

To be crystal clear, a big part of winning on the short side has to do with both timing and awareness: 

A) What economic Quad is the market trading towards?
B) What works, on the short side, in that Quadrant?
C) Is that thing you want to shoot at signaling Bearish @Hedgeye TREND

Consider the alternative: you’re a hedge fund guy who starts every discussion about a stock with “valuation” and you’ve been shorting Utilities (XLU) “because they’re super expensive” as they continue to tag all-time highs… 

In addition to studying the complexion of market bounces, deliberately do the same on down days like yesterday: 

  1. In a down tape, Utilities (XLU) led Sector Style gainers with another +0.8% up day
  2. Long-term Treasuries (TLT) were up (again) +0.6% pounding HIGH BETA US Equity alternatives
  3. Oil & Gas Stocks (XOP) led Sub-Sector losers at -3.8%, Semis (SMH) were down -1.8% 

Thank goodness I sold both my Tech and Energy exposures. Those puppies get hosed when the market starts to price in a Quad 4 Scare. 

I have a “liberal” education, so I’m personally open to short-selling both “cheap” and “expensive” stocks. Semiconductors and FedEx (FDX) look super “cheap” to the dude with a Yahoo Finance quote of the multiple… 

But both get smoked in Quad 4. 

On the “expensive” side of the dashboard, in addition to Short Tesla (TSLA), one of my analysts (Andrew “Freebird” Freedman) timed Short Netflix (NFLX) beautifully (so far). 

If we’re going to Quad 4 War, I’ll take Van Sciver (TSLA) and Freedman as my short-selling wingmen all day long. 

Who’s on your team when it comes to dog-fighting on the short side? I assume every great Institutional Research and Asset Management team has to have some Top Guns to go to when there’s “risk on” to be managed. 

If you don’t have those kinds of teammates, we’re humbled and honored that you’ve outsourced this to Hedgeye. 

When it comes to short selling and riding profitable shorts, timing matters as much as anything else. Here’s a Top 10 List of Diversified Shorts that I’d have on this morning (i.e. I have them all on in Real-Time Alerts): 

  1. Junk Bonds (JNK)
  2. Russell 2000 (IWM)
  3. Materials (XLB)
  4. Brazil (EWZ)
  5. Short USD vs. Long Yen
  6. Netflix (NFLX)
  7. Unitedhealth (UNH)
  8. Penn Gaming (PENN)
  9. Health Equity (HQY)
  10. Rollins (ROL)

Although I’m not allowed to give personal advice on how to “size” your short book, that’s how I’d have mine sized this morning (JNK the biggest to ROL the smallest). 

While I tend to have no “valuation” bias, this short book has some super “expensive” stocks. NFLX, HQY, and ROL trade at 131x, 60x, and 54x trailing 12-month earnings. 

Other than what happened last time when US Equities traded on Quad 4 in Q4, what could possibly go wrong with non-cheap stocks that don’t do well in Quad 4 anyway? Ride short-selling cowboys, ride! 

UST 10yr Yield 2.33-2.46% (bearish)
SPX 2 (neutral)
RUT 1 (bearish)
Utilities (XLU) 57.51-59.77 (bullish)
Shanghai Comp 2 (bearish)
VIX 13.05-21.90 (bullish)
USD/YEN 109.11-110.89 (bearish)
Gold 1 (bullish)
Copper 2.64-2.77 (bearish)
NFLX 338-365 (bearish)
TSLA 179-219 (bearish)

Best of luck out there today,

KM 

Keith R. McCullough
Chief Executive Officer

Riding Shorts - Chart of the Day