“Whoever is careless with the truth in small matters cannot be trusted with the important matters.”
~ Albert Einstein
The truth is that the US stock market finally closed up for 2 days in a row. The truth is that the SP500 is up +0.2% now for the month of June. The truth is that 2 days and 0.2% does not an immediate or intermediate term TRADE or TREND make.
The truth is that I was just parked on I-95 for almost 2 hours this morning, so I’m going to keep this short and to the point. Into and out of last week’s YTD closing lows for US, European, and Asian equity markets, we covered a lot of short positions (covered SPY on 6/4; covered QQQQ on 6/7). Our cash position in the Hedgeye Asset Allocation Model peaked at 79% early last week. This morning we’ll open the week with a 70% cash position and a 3% position allocated to US Equities.
The truth is that global markets, from countries to their currencies and commodities remain broken from an intermediate term TREND perspective. In the Hedgeye Risk Management model, the intermediate term TREND duration is 3 months or less. If this morning’s rally in the US futures holds and we see the first 3-day rally in US Equities since April, the truth will also be that the immediate term TRADE lines across markets, globally, will come back into play.
In the Hedgeye Risk Management model, the immediate term TRADE is 3 weeks or less in duration. Here are those TRADE lines of resistance (we continue to use them as critical lines of resistance, or stops, as we look to bear market rallies as selling opportunities):
- S&P 500 = 1104
- Dow Jones Industrial Average = 10,312
- Nasdaq Composite = 2276
- Russell 2000 = 661
- S&P Consumer Discretionary Sector (XLY) = 32.64
- S&P Financials Sector (XLF) = $14.97
- Goldman Sachs (GS) = $141.91
We bought Goldman Sachs (GS) last Thursday at $133.04. This is a good example of buying a great franchise at a great price but, at the same time, understanding what duration we were buying the stock for. Every stock, commodity, currency, etc. can get immediate term oversold. In this environment, that’s where we want to be covering shorts and buying longs. Every market has a time and price where you need to be active.
At the same time, we don’t want to try and pretend to be Warren Buffett here, so you need the discipline to sell/short whatever you bought/covered if it can’t breakout above its immediate term TRADE line of resistance. That’s how we think about risk management in a bear market. As a practical matter, whether it’s the SPY, XLF, or GS, we consider selling decisions at both the security level and in the aggregate.
The truth is that not every investor you are competing with on the bid or offer is duration agnostic. The truth is that some investors are landlocked in a style that doesn’t allow them to capture the immediate term alpha that you can pull out of a market that is breaking down but inevitably bounces. The truth is that this is going to provide a huge advantage to those who are equipped to manage both their absolute exposure to cash and net exposure to short positions in 2010.
From a Hedgeye Macro Theme perspective, we remain very bearish on the only bubble that remains – that of the Fiat Fools in Big Keynesian Governments. After we covered our short position in the Nasdaq last Monday, we also shorted the US Dollar (UUP) as a way to express our being negative on the US deficit and debt disasters that America has yet to address. The good news for Europeans on deficit spending is that they are at least starting to tell the truth.
While a down Dollar may very well be reflationary for commodities priced in US Dollars in the immediate term (we have a 6% allocation to Commodities), in the intermediate term the truth has already been told by the Europeans as to where the Road to Keynesian Perdition ends – with austerity measures. The truth is that we aren’t telling Americans the truth about that because they won’t like austerity measures either.
My immediate term support and resistance levels for the SP500 are now 1082 and 1104, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer