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“The lesson is clear: when we celebrate a great achievement, we are not just celebrating hard work, but also a competitive process where some have won and others have lost.”

-David Shenk

I was reading David Shenk’s new book ‘The Genius In All Of Us’ on Friday and couldn’t stop smiling. Finally, the Perceived Wisdoms associated with intelligence being endowed upon us genetically are dying on the vine of science. This is another major victory for those of us who agree with Shenk that “talent is not a thing; it’s a process.”

Risk management is a process. So is being proactively prepared for The Keynesian Elixir that has become our global economic resolve. Per our friends at Wikipedia, “an elixir is a sweet flavored liquid used in compounding medicines to be taken orally in order to mask an unpleasant taste and intended to cure one’s ills. Elixir in the noun form means a drink which makes people last forever.”

Forever is a long time. I won’t spend this morning reminding you who was bullish at SPX 1217 on April 23rd with the expectation that this bull rush was going to last forever. I don’t need to waste your time calling out who made short sales on Friday’s lows expecting that global markets would go down forever either. What we have here is a very healthy competitive process where some will win and some will lose. That’s my kind of capitalism.

I spent Thursday and Friday covering shorts and getting long. On Friday, I added a 3% position in the Nasdaq (QQQQ) to our Hedgeye Asset Allocation Model, taking our allocation to US Equities up to 6%. I started the week with a zero percent allocation to US Equities. We were short the SP500 (SPY), and now we are long that too.

How can I be bearish on US stocks and end up being long them this morning? The answer to that question is fairly straightforward  - time and price. Just because our Q2 Macro Theme for April Flowers/May Showers is playing out doesn’t mean I need to press it at every time and price. That’s what a sell-sider who has never managed money before would do. Every risk manager who has traded a market knows that, at a price, gains on the short side are meant to be taken.

We like to keep score. Some people love that. Some people love to hate it. My job isn’t to wake up and try to make friends. It’s to augment your investment process with some risk management thoughts that don’t pander to whatever it is that professional meeting organizers do.

For the month of May to-date, here’s the score for US Equities: Dow -5.7%, SP500 -6.4%, Nasdaq -8.0%, and the Russell 2000 -8.9%. This is what we call a market that’s immediate term oversold. That doesn’t mean that it’s not broken or bearish. Oversold is as oversold does.

From a risk management perspective, it’s not only critical to probability weight where we are immediate term oversold, but to also have a point of view on ranges of probabilities as to where we could bounce. For two long positions that I currently hold (SPY and QQQQ), here are those ranges:

  1. SP500: 1110-1143, with 1143 being our intermediate term TREND line of resistance, and 1172 being the line that’s in play if we close > 1143.
  2. Nasdaq: 2, with 2335 being our intermediate term TREND line of resistance, and 2425 being the line that’s in play if we close > 2335.

On the short side, we shorted the US Dollar on strength last week (on 5/6/10 at 11:29AM) as we thought the Euro was immediate term oversold and the Dollar (UUP) immediate term overbought. At Hedgeye, we define immediate term as the “TRADE” which is 3-weeks or less in terms of duration.

We remain bearish on the Euro for the intermediate term TREND (3 months or more) but, again, that doesn’t mean we are bearish on the Euro at every time and price. While our Q2 Macro Theme of Sovereign Debt Dichotomy had us short the Euro and long the US Dollar, for the immediate term TRADE both of these gains needed to be booked. Here are our refreshed lines of support/resistance for these currency markets:

  1. US Dollar: $83.06-84.59
  2. Euro: 1.26-1.31

 Altogether, all of this presents me with 2 simple macro questions this morning:

  1. Where do I sell the QQQQ and SPY?
  2. Where do I re-short the Euro and cover my trading short in the US Dollar?

We can get all caught up in the semantics of whether or not this is “too trading oriented”, but I have yet to see a legitimate risk management process that doesn’t need to execute trades in real-time. As time and prices change, we do. It’s a competitive process, not a popularity contest.

Whether we agree ideologically with The Keynesian Elixir of European governments attempting to bail out neighboring governments or not, the only thing that is going to help us all from ourselves this morning is being right. Then we can all celebrate great achievement in risk management, together.

Best of luck out there today,


The Keynesian Elixir - S PCHART