“You’re going to have to make a decision the direction you want to go.”
- John Boyd
Are you professionally trading US equity markets or panicking about v-bottoms? Honest question. I challenge you to be self-effacing about the answer this morning. It will help you improve your short-term decision making #process. We can always improve that.
As many long-time subscribers (thank you) know, in the very short-term (trading my p.a. and Real-Time Alerts) I employ the Mad Major, John Boyd’s, decision making framework that he first used in dog-fighting in the US Air Force: The OODA Loop.
OODA = Observe, Orient, Decide, Act. There’s no F (feel), E (emotion), or V (valuation) in OODA, is there? Especially if you’re trading a market with 40-80 short-term VIX type volatility, your observations should be mathematical and your decisions should be rules-based.
Back to the Global Macro Grind…
I guess I threw some new subscribers for a complete loop of their own when I covered all my US Equity Shorts on the open again yesterday. Especially for intermediate-term to longer-term Full Cycle Investors, I can completely understand why.
Real-Time Alerts is neither the intermediate-term TREND call nor The Cycle itself. It’s short-term trading!
I not only understand their confusion but empathize with their brains. As human beings, we have way too many cognitive biases. It’s impossible to maintain opposing thoughts across investment durations and execute in a short-term OODA Loop unless you built your process to do that.
Huh? It’s simple, really:
A) You’re either Bullish (Gold and Treasuries) or Bearish (Tech Stocks) from a longer-term Full Cycle Investing perspective … and
B) Your short-term TRADE signal can be bullish or bearish irrespective of your fundamental intermediate-term TREND views
It’s really not that hard to understand. What’s hard for humans is rationalizing the WHY on opposing signals vs. fundamental thoughts.
Example (from yesterday’s Real-Time Alert on Tech Stocks):
- BUY SIGNAL – Covering Short XLK $83.78, 9:54 AM EDT
- EXPLANATION – My vol of vol signal is suggesting I might be able to re-short Tech (XLK) higher
And I went on to write that “I have no idea why, but I do better when I obey my signal over my thoughts…”
Yes, as many of you also know, I had the lowest SAT score in my class @Yale so I should fade my own thoughts as often as possible! The D&A (Decide & Act) part of the OODA Loop doesn’t ask an NFL running back what his report card said when cutting to open space.
I had another good question about this particular short-term decision (a damn good one btw as I went on to cover ALL US Equity Shorts in the morning and added a few back as the US stock market was ramping towards the top-end of my REFRESHED @Hedgeye Risk Range into the close):
Q: On The Macro Show you said there was more downside than upside in your SPY Risk Range, so why take the risk covering shorts?
A) I didn’t just cover shorts – I went net LONG US Equity after buying Consumer Staples (XLP), Kroger (KR), etc.
B) The “upside vs. downside” in the Risk Range matters in the O (Observe) part of the short-term decision (it provides context)…
C) But it says nothing about the probability of going to the top or bottom end of that Risk Range in real-time
That’s where the second O (Orient) comes, quickly, into play.
Since the bottom of my vol of vol signal fell out PRIOR to my cover Tech (XLK) signal (I was long US Equity Vol via VXX and signaled to SELL that at 9:48AM EDT #timestamped), the probability went straight up that we could see the top-end of my Risk Range.
Obviously, by the time SPY hit the top-end of the range, the probability was 100%!
Reality is that I really don’t know if explaining my short-term decision-making #process is making sense to everyone this morning. It probably shouldn’t matter to those of you who don’t either have the time to trade or think about your exposures that way.
But, unlike almost everyone else you might read at the top of the risk management morning, A) I’m sincerely trying to help you understand every part of what I’m doing and why so that B) I can review and understand my process better for myself.
What matters most about my short-term trading decisions is that they are working for the right reasons. Yesterday wasn’t luck. The day before that wasn’t either. In RTA I’m 25 for 29 in April (88% batting average) with an average loss of -1.36% on the 4 losers.
In other words, fundamentally, I’m a raging bear on US “stocks” who is making money in a short-term UP market while running mostly net SHORT. The only way I’ve been able to do that is by learning from 22 years of trading mistakes.
I’ve learned that the WHY on making trading decisions matters a lot more than WHY that may or may not make “fundamental” sense.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.56-0.82% (bearish)
SPX 2 (bearish)
RUT 1045-1212 (bearish)
Consumer Staples (XLP) 52.27-58.78 (neutral)
Tech (XLK) 74.62-86.79 (bearish)
VIX 38.04-66.36 (bullish)
USD 98.40-101.53 (bullish)
Oil (WTI) 17.62-29.92 (bearish)
Gold 1619--1719 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
