“How do we construct order and meaning out of this mess?”
- Colonel John Boyd
Yesterday’s fresh all-time SPY highs came on both #decelerating earnings and #decelerating US Equity market volume. There was no follow-through to that FOMO in Global Equity market trading overnight. From these prices, what could possibly go wrong?
The aforementioned quote comes from The Man, John Boyd, in explaining how we can try to make sense out of divergences. When some things are doing something different than other things, what is economic reality? What is the truth about future returns?
“To make sure the new reality is both viable and relevant, it must be continually refined by verifying its internal consistency and by making sure it matches with reality.” (Boyd, pg 325)
Back to the Global Macro Grind…
‘But KM, what do you make of the Russell breakout?’
I had that question 100% more of the time than I did about epic Global Macro #divergences yesterday. It was 100% because I guess no one who asked has my version of John Boyd’s OODA Loop as desktop Level 1 analytics when looking at the total Global Macro market picture.
At my most basic Level 1 core screen I have 27 market factors across 3 explicit durations. A one-day move in the Russell to -6.8% vs. where it put in its cycle peak (most of the move happened in ½ a day of no volume trading btw) is neither:
A) A new and confirmed Bullish @Hedgeye TREND, nor
B) Disconfirming Bearish @Hedgeye TRENDs in Copper, KOSPI, Global Bond Yields, etc. this morning
Notwithstanding that it’s both a shortened holiday week of trading and that it’s the last few days into month-end markups, Total US Equity Market Volume was down -6% vs. its 1-month average yesterday (and volume has been decelerating for almost a month!).
The fully loaded ramp in all of US Equity Beta yesterday made perfect sense because:
A) Both SPY and the Russell (IWM) signaled immediate-term TRADE #oversold on Thursday
B) That’s what markets do off the low-end of my @Hedgeye Risk Range (they bounce!)
Why else would I have covered all but 2 shorts on Thursday in Real-Time Alerts and moved to 8 longs? For hedge funds that run “net neutral” that’s a pretty wild and crazy net long position for me in my p.a. eh?
So I waited and watched and added 1 Consumer Discretionary short into the close (GOOS)… and I’ll add more of our favorite Software Shorts back to Real-Time Alerts after the Palo Alto Networks (PANW) smack-down overnight.
Why did PANW (trading down -8% after reporting #GrowthSlowing and that they’ll try to buy growth at peak multiple prices) go up into the print? Because The Machine took it there and PMs were forced to believe that was pending economic reality…
It’s not just PMs who have a career risk management exercise to deal with here chasing their benches into year-end. I couldn’t make this up if I tried, but PE Powell told the audience yesterday that “I see the glass much more than half full.”
Not more than half. That’s Trumpian “much” more…
And… the 10yr Bond Yield dropped on that as The Curve continues to compress… because, wait on it… the bond market doesn’t believe Powell’s forecasts as much as it believes both Palo Alto and our USA Nowcast of 0.29% headline GDP for Q4.
Relative to the D.C. lawyer’s lens on US GDP, that’s less than half empty.
But no worries, “earnings have been better than expected” with:
A) 480 of the SP500’s companies having reported an aggregate year-over-year decline of -1.13% …
B) And Tech Earnings at down -5.8% vs. Utilities EPS leading gainers at +9.7%
With both Sector Styles (Tech and Utes) being in the Top 4 Sectors you want to be long with the US economy in #Quad3 Stagflation (alongside REITS and Energy), what could possibly go wrong if you get a stock wrong (PANW) within a Sector that The Machine is chasing?
What we do know is that 100% of the people calling for the “bottom” in things like earnings (after their 1st quarter of going negative) had no process to call the topping process of either the GDP or US Profit Cycle before multiple periods of what they call “risk on” happened.
Which is why you shouldn’t listen to things people say or chase one off charts they send you. Instead, you should always consider the next economic data point and/or market move within the context of a multi-factor, multi-duration risk management #process.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.70-1.88% (bearish)
SPX 3086-3139 (bullish)
RUT 1 (bearish)
NASDAQ 8411-8653 (bullish)
Utilities (XLU) 61.57-63.48 (bullish)
REITS (VNQ) 90.48-93.90 (bullish)
Energy (XLE) 58.47-60.90 (bullish)
Shanghai Comp 2 (bearish)
DAX 13103-13293 (bullish)
VIX 11.66-14.65 (bearish)
USD 97.50-98.47 (bullish)
Oil (WTI) 55.56-59.05 (bullish)
Gold 1 (bullish)
Copper 2.61-2.69 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
