“I see a move, a combination, almost instantly.”
-Gary Kasparov
Got short-term pattern recognition, STPA (short-term perf anxiety) and some charts? After Day 6 of a Counter @Hedgeye TREND bounce in everything you should not be chasing in Quad 4, how do you feel about this market?
How did you feel 1-month ago ahead of the steepest point of the May decline? While my data-driven #process aspires to feel absolutely nothing, I’m still just a 44 year old man with feelings. I study my feelings and decision making processes in detail too.
The aforementioned specialist Kasparov quote comes from a great summer-time read I’m recommending called Range – Why Generalists Triumph In A Specialized World, by David Epstein.
Epstein juxtaposes 2 different schools of thought on short-term decision making using 2 thought leaders I’ve cited over the years: David Klein and his NDM Model (“natural decision making”) vs. Danny Kahneman’s Thinking Fast, and Slow…
Naturally “smart” decision makers can also be thought of as people who see recurring, linear, patterns. They obviously exist and thrive in many fields. The arena that is macro markets, however, is non-linear and loaded with episodes of short-term entropy.
“When Kahneman probed the judgement of highly trained experts, he often found that experience had not helped at all. In the short-term, even worse, it frequently bred confidence but not skill.” (pg 19)
Back to the Global Macro Grind…
Did you make money in Q4 of 2018? How about in May of 2019? Was that skill or luck?
If you crushed it in both JAN of 2019 and again (so far) here at the beginning of JUN, was that skill or luck… or the Fed just telling you they’ll save you from the economic gravity (growth and inflation #slowing) that caused your Q418 and May 2019 losses?
If I were to give you my money to manage, the #1 thing I’d care about is your risk management #process. Can you make/save money when the crowd is losing money? When everyone’s making money, do you have a #process to ride those waves too?
While I rode a nice 2.5 year wave on the long side of US #GrowthAccelerating (2016-2018) I’ve personally struggled during JAN and JUN of 2019. To be clear, JAN and JUN aren’t signaling the same thing.
Notwithstanding that the US economy narrowly re-entered Quad 1 in Q119 (bloated inventories), then pushed to Quad 3 in Q2, right now I’m trying to calibrate what the next big intermediate-term TREND move is going to be, and position for that.
IF our fundamental intermediate-term TREND outlook for:
A) USA’s economy re-entering Quad 4 in Q3… and
B) Negative year-over-year PROFITS in Q3
Proves to be correct… THEN, my risk management #process says to:
A) SELL at lower-low-volume-highs towards the top-end of my @Hedgeye Risk Ranges
B) Especially as implied volatility DISCOUNTS manifest as both capitulation & complacency
I don’t move on that “instantly.” While last week might “feel” like forever ago in STPA (short-term-perf-anxiety) space, I’d covered all but 2 of my SHORTS in Real-Time Alerts and started adding SHORTS back, slowly, since.
This morning I’m up to 14 SHORTS (about ½ way to a fully invested SHORT book of ideas) and it looks like the market is going to give me better (higher) prices once again.
In sharp contrast to the views that:
A) “The Fed is going to cut rates, buy stocks” and/or
B) “China trade deal back #on because Mexico was”
All I’m doing is executing on the A/B Test of my #process:
A) What economic Quad are we heading into
B) Where’s the market pricing that (TRADE vs. TREND signals)
Where could I be wrong? That’s an easy answer – if the economic data doesn’t register Quad 4 in Q3. Hopefully, if the data changes, I change my positioning fast (instead of slow), like I did when I sold my Energy (XLE) and Tech (XLK) longs in May.
Ultimately, I guess that’s the point about my process. When I acted quickly, selling all Quad 4 exposures in both SEP 2018 and MAY of 2019, the crowd wasn’t acting fast or emotionally at all.
With implied volatility DISCOUNT of -13% on SPY (vs. 30-day realized) this morning vs. a +56% implied volatility PREMIUM only 1-month ago today, the crowd is chasing higher-lows here inasmuch as it was selling the lows last month…
The goal of The Game is to beat the crowd not be the crowd, when The Quads are about to turn.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.02-2.26% (bearish)
SPX 2 (neutral)
RUT 1 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 57.71-60.99 (bullish)
Shanghai Comp 2 (bearish)
DAX 110 (neutral)
VIX 15.00-20.30 (bullish)
USD 96.20-98.25 (bullish)
Oil (WTI) 49.78-57.76 (bearish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
