“He was pitted against a Go player on a level that no one had ever seen before.”
- Kai-Fu Lee
No the player wasn’t a super smart sounding hedgie from Billions. It wasn’t a he or a she either. It was a machine.
“On this May afternoon in 2017, Kai Je was locked in an all-out struggle against one of the world’s most intelligent machines, AlphaGo, a powerhouse artificial intelligence backed by Google.” -AI Superpowers, pg 1
Kai-Fu Lee calls that day in 2017 “China’s Sputnik Moment”… for ambitious young Chinese developers, who want to A) win and B) disrupt industries, with no shame stealing other people’s processes and/or technologies.
Back to the Global Macro Grind…
At critical market turns, are you sure your investment and risk management process isn’t getting beat up by The Machine?
If yesterday (day 3 of a -7.6% correction in SPY) wasn’t a glaring example of The Machine forcing the hedge fund community to take down its gross long US Equity exposure, into the throat of the draw-down, I don’t know what is.
But they’re “secular growers”, eh…
While I spend lots of time writing to you about the A/B Test of:
A) What economic Quad were nowcasting towards … and
B) What my TRADE/TREND/TAIL (price/volume/volatility) Signals are seeing
The SETUP (market positioning) matters, big time, especially at the turns. In fact, the setup usually perpetuates the speed of the melt-up or draw-down. My process goes both ways, don’t forget.
Obviously FX, RATES, and COMMODITIES markets have been signaling #Quad4 USA and China for over a month now. But the US Equity market didn’t start to undergo what I call a Bearish #Quad4 Phase Transition until the last 2-3 trading days.
Only 1 week ago today, here was that epically complacent and capitulatory US Equity SETUP:
A) BETA (SPY) was probing the top-end of my @Hedgeye Risk Range (which is a “sell-some” signal on its own)
B) IVOL (implied volatility) was trading at an 8-11% DISCOUNT vs. 30-day realized
C) GROSS hedge fund exposure was in the 95th percentile of 1-year readings
That last bit wasn’t surprising to me but was at least quantified by my friends at Goldman Sachs yesterday. There’s a good Bloomberg article explaining the same from Morgan Stanley’s prime brokerage data as well this morning.
As is usually the case, the Old Wall and its media tells you precisely what happened… after it happened… with no proactive risk management notes, signals, or process prior to it happening.
Then, once it’s happening (at a faster rate), stealth PMs are like world class Go players – they figure out what patient process-driven positioning will help them encircle the frantic “tactical” traders who are getting whipped by their Moving Monkeys.
Got process-driven positioning … or everyone else’s long ideas? From a Factor Exposure perspective, here’s what worked from OCT to mid-FEB when The Machine was pricing #Quad3 into US Equities:
- Secular Growers
- Quality
- Growth
And, as The Machine phase transitions into #Quad4, what are its Top 3 Factor Exposure Shorts/Underweights?
- Momentum
- High Beta
- Secular Growers
So the question isn’t whether a portfolio of high beta story stocks (HIGH SHORT Interest drove part of the MOMENTUM factor in early-mid FEB) got crushed in the last 3 days. The question is do you buy the damn dip in those today?
Short Answer: No.
The answer, my machine learning friends, isn’t blowing in the qualitative wind associated with what you think about a “great company.” It’s in understanding that there’s a big difference between a good company and a good factor exposure.
Here are 3 of the Top 4 Factor Exposure Longs/Overweights that you should be buying on dips in #Quad4:
- Low Beta
- Dividend Yield
- Quality
So instead of getting mad at the Go board, why not embrace reality of The Machine’s decision making tree and up your gross exposure to your stock ideas that fit that factor exposure profile while you take down exposure to the #notgood stuff.
Being grossly exposed to economic Quad & Factor unawareness is no place for Old Wall men and women. The Machine’s momentum and might is on a level that no one running money has ever seen before.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.31-1.51% (bearish)
SPX 3073-3301 (bearish)
RUT 1 (bearish)
Utilities (XLU) 67.74-71.64 (bullish)
REITS (VNQ) 94.88-100.83 (bullish)
Tech (XLK) 91.02-99.81 (neutral)
Nikkei 221 (bearish)
DAX 129 (bearish)
VIX 16.45-32.35 (bullish)
USD 98.44-100.08 (bullish)
EUR/USD 1.07-1.09 (bearish)
Oil (WTI) 48.67-53.15 (bearish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
