“Understanding the OODA loop enables a commander to compress time - that is, the time between observing a situation and taking an action.”
- John Boyd
When PE Powell moved to protect The House (the stock and credit markets) yesterday, what did you do? Did you panic, like he did? Did you chase the intraday high? Or did you take that extra deep breath and ask yourself what your process prepared you to do in compressed time?
I get it. We all make mistakes. Some of us win when others lose big too. This isn’t some elementary school test where everyone gets a sticker. This is a game that we all strive to play at the highest level. There is a gross amount of compensation allocated to those with the best results.
In the compressed time period of this morning’s US stock market open, you have another opportunity to take specific actions. Will you “buy stocks” on something like “Biden”? Not if you’re following my #process. #Quad4 + VIX > 31 + HYOAS > 400bps wide remains reality.
Back to the Global Macro Grind…
I get that not everyone gets that the Fed going to the 4th, 5th, etc. panic rate cuts isn’t a good thing. To put the 50 basis point panic cut in context, the US Federal Reserve has not done that since 2008.
The setup for the panic (surprise) cut mattered too. It came on the heels of the biggest Counter @Hedgeye TREND bounce day (SPY +4.6%) since… drumroll… 2008. October 2008, that is. Those of you who made successful decisions to sell bounces back then remember it well.
To bounce big like that, market prices generally need to:
A) Have gone down a lot (SPY corrected -13% in a week)… on
B) #Accelerating Volume … and
C) Undergo a Phase Transition in Volatility
Again, this isn’t for the inexperienced to risk manage. A commander (portfolio manager) needs reps in the OODA Loop to understand what NOT to do when the other side of the trade is making short-term mistakes.
Short-term moves always happen within the context of intermediate-term TREND conditions. Economically those were:
A) #Quad4 in China
B) #Quad4 in the USA
C) #Quad4 re-developing in Europe
Quantitatively, what Powell did was the equivalent of pulling the rip cord early. It happens. He’s a rookie commander. I see rookie parents, coaches, and portfolio managers panic all of the time. It’s all part of our life-experience as human beings.
We only really learn through mistakes.
Powell wasn’t the only one who screwed this up. As I pointed out yesterday, both the Japanese and Australian wanna-be central planners of economic gravity (the BOJ and RBA) pulled the rip cord way early too.
Post their 25 basis point cut, Australian “stocks” dropped another -1.7% overnight.
While it may not be clear to these central-market-planning people, perpetuating a crash in long-term interest rates when #Quad4 economic conditions are going to do that anyway, only take their Bank “Stocks” down, faster.
US Financials (XLF), which are a core #Quad4 Short, were down -3.8% on panic rate cut day.
The other side of that #Quad4 book acted awesome in the critical OODA Loop moments that mattered. If you were long Treasuries, Gold (+3.2% on the day), Utilities, REITS, etc. against Tech (XLK), Fins (XLF), and Energy (XLE) shorts, you mowed down your competition like enemy MiGs.
Again, this isn’t a victory lap. This is reminding you that winning for the right reasons is how we all get paid. It’s how you grow your business.
Now what? Well, with the UST 10yr Yield crashing to 0.94% and immediate-term upside in my VIX Risk Range to the 45-47 altitude, I’m not slapping on an Relative-Value-Bernie-Biden trade here. On my apolitical and data-driven dashboards, those factors didn’t and don’t exist.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.87-1.29% (bearish)
UST 2yr Yield 0.63-1.08% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
Utilities (XLU) 61.39-71.50 (bullish)
REITS (VNQ) 85.50-94.60 (neutral)
Tech (XLK) 84.17-95.93 (bearish)
Nikkei 2002 (bearish)
DAX 110 (bearish)
VIX 22.49-46.96 (bullish)
USD 96.90-100.20(bullish)
EUR/USD 1.07-1.12 (bearish)
Oil (WTI) 43.20-51.18 (bearish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
