“I reckon I tried everything on the old apple but salt and pepper and chocolate sauce topping.”
- Gaylord Perry
Do you like to cheat, just a little? Got any great contacts at the Fed who can get you a little looksy on what super-late-cycle investment mistake they might bailout next? That’s cool. I see you. I’ve got a little secret @Hedgeye Risk Range sauce of my own to front run you.
Back to the Global Macro Grind…
For those of you who don’t know who Gaylord Perry is, he was the first MLB pitcher to win the Cy Young Award in both the American and National Leagues. In chapter 10 of The MVP Machine titled “Spingate”:
“I’d always have the grease in at least two places in case the umpires would ask me to wipe one off.”
- Gaylord Perry
I know. Everything is awesome, until someone reveals the truth about how it got done. In that same chapter, renegade data-driven-process pitcher, Trevor Baeur gave us the big reveal on how the Houston Astros were cheating. It took them some time to get caught too.
Don’t worry, I’m not going to rat anyone out this morning.
Personally, I find The Game more fun when playing against people who know that I know exactly what they’re doing. I wasn’t very good at baseball. But, if this was a hockey game, I’d have no problem two-handing them in the back of the ankles when the refs aren’t looking either.
Yeah, everything is awesome again. After they crashed, they got their Junk (JNK) and spitballs to bounce to lower-highs. They even got the narrative @CNBC to shift back to something like “you don’t have to get the fundamentals right, you just can’t fight the Fed” too…
Well, sort of. Being aligned with both the Fed and economic gravity (Long Gold and Treasuries) has been as awesome as awesome gets (read: no crashing of your hard earned capital or excuses on epic draw-downs). A big part of these bear market bounces in Late Cycle Equity & Credit were:
A) Late-to-the-cycle-party bears who shorted the lows in late March and…
B) Perma Bulls who weren’t quite as “plugged in” as the people in the know were on saucy Fed fingers
Looking at non-commercial net positioning of futures and options contracts as of last Tuesday’s market close:
A) The SP500 (Index + E-mini) net SHORT position went to a 3-year high of -165,158 contracts, registering -4.04x on a 1yr z-score
B) The Dow (mini) net SHORT position of -6,303 registered -2.49x on a 1-year z-score
For those of you who are new to our risk management #process, anything +/- 2.0 on a 1-year z-score means consensus is leaning 1-way AFTER a big market move. Both the SP500 and Dow having their fastest stock market crashes since 1987 certainly qualifies as an AFTER thought there.
Interestingly, despite the bear market in SMALL CAP “stocks” starting prior to that of the big cap US Equity market:
A) The Russell 2000’s net SHORT position was only -11,669 contracts, registering a +0.25x on a 1-year z-score… and
B) That’s nothing compared the to MAX net SHORT position of -182,600 in the last 3 years
Again, to be fair, unlike in the entire edifice of “High Yield” ETFs products or the hedge fund community’s equity hedge (SPY), no one in the upper echelons of The Connected lobbied the Fed to buy Small Caps or Oil in the last month – so they just flamed out, again, yesterday:
A) Small Caps (IWM) were down -3.2% at one point yesterday, so I covered my short position for my 10th straight win there
B) Oil turn-tailed post the latest central-market-planning attempt by both President Pump, the Saudis, and OPEC
Covered shorts? Oh yeah, baby. That’s how we professional short sellers do it. We put a little Sauce Hockey on it, trade it, and keep scoring. We knew that JP Morgan was going to issue SBA (is it Small Business or Small Cap?) loans to their banking clients (even though they’re public companies!).
We knew we’d get another “the bottom is in” bear market rally in the Russell to sell into too.
Despite Ruths Chris (RUTH) and the ole Potbelly Corp (PBPB, great name for a gov bailout corp) getting those loans from the Old Wall this morning (see Howard Penney’s tweets/notes for the details), I’ll happily re-short the Russell (IWM) again when my risk management signal says go.
Since The Cycle peaked, the Russell 2000 has crashed -30.3%. That means that The Connected ones only need to get that sucker +42% (from here) to get those who made the super-late-cycle investment mistake of buying levered small caps back to break-even.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.56-0.82% (bearish)
SPX 2 (bearish)
RUT 1112-1251 (bearish)
Consumer Staples (XLP) 52.98-59.44 (neutral)
VIX 37.02-59.64 (bullish)
USD 98.66-101.13 (bullish)
Oil (WTI) 18.13-28.37 (bearish)
Gold 1670--1789 (bullish)
Copper 2.14-2.34 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
