“You must operate inside your adversary’s time scale.”
- John Boyd
That’s right. In the short-term windows of risk that matter (i.e. when consensus is losing money), John Boyd’s OODA Loop #process begets staying 1-2 steps ahead of the enemy. In macro markets, that’s whoever is chasing the other side of your TRADE.
Being Macro Aware of the intermediate-term TREND that contextualizes your every shorter-term TRADE is critical. Ideally, the “enemy” (or, more politely, your competition on a bid/ask spread) has plenty of backward-looking baggage keeping them 1-2 steps behind.
“If their mental processes become focused on internal dogmas and isolated from the unfolding, constantly dynamic outside world, they experience mismatches between their mental images and reality” (Boyd, pg 326). Sound familiar? #Charts
Back to the Global Macro Grind…
Operating inside of a month and year-end performance chasing’s time scale was not easy in November. Wall Street consensus clearly got long what we call a #Quad2 economic outcome. Reality is that both the Chinese and US economies are in #Quad3.
And now… wait for it … Trump is saying his massive #BeanDeal can “wait until after the election.”
That’s definitely not the headline the biggest net SHORT position in the history of the VIX (over 210,000 contracts) was hoping for in December. Then again, hope is not a risk management process.
I didn’t need that Trump headline to short the Russell 2000 (IWM) at last week’s big lower-highs. If I knew that headline was coming today, I wouldn’t have covered-some of my SMALL CAP Factor short in my personal accounts yesterday either.
What anyone who runs real long/short risk managed money successfully does is constantly trade around his/her core. Core positions (Long Treasuries, Short Russell since SEP 27, 2018, as examples) are born out of the conviction of the research process.
If yesterday’s ISM report in the USA didn’t build “conviction” that it’s #Quad3 (and not #Quad2), you need a new process!
To recap what ramped the VIX from the 11-12 short-term window of risk zone to 15 yesterday:
A) ISM headline #slowed for the 4th straight month to 48.1 NOV vs. 48.3 OCT
B) ISM New Orders #slowed to a 90-month low of 47.2 NOV vs. 49.1 OCT
No bounce (never mind a big one) and a 90-month low in THE leading indicator for US Capex? What could possibly go wrong?
As you can see in today’s Chart of The Day, US Capital Spending (Capex) has some catching DOWN to do. Unbeknownst to the Macro Unaware who is just eye-balling a “level” of the ISM (rather than the rate of change), lower-cycle lows in New Orders are very bad!
And what happens when Durable Goods INVENTORIES are at The Cycle highs with New Orders crashing to new cycle lows? Margins compress and #EarningsSlowing slow at a faster rate to the downside.
Again, not what the internal dogmas of consensus #Quad2 US Equity positioning are looking for.
But, if you’ve been measuring and mapping the unfolding and constantly dynamic Global Macro market across multiple factors (equity, commodity, rates, etc.) and multiple durations, you got this. You don’t have to wait on the next Trump tweet.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.70-1.84% (bearish)
SPX 3088-3159 (bullish)
RUT 1 (bearish)
Utilities (XLU) 62.29-63.48 (bullish)
Energy (XLE) 58.21-60.51 (bullish)
Shanghai Comp 2 (bearish)
VIX 11.74-17.55 (bullish)
USD 97.42-98.50 (bullish)
Oil (WTI) 54.65-59.77 (bullish)
Gold 1 (bullish)
Copper 2.60-2.70 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
