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Editor's Note: Hedgeye CEO Keith McCullough is giving you an entire week of complimentary access to his must-read morning research note "The Early Look." Read today's edition below. Read this week's Early Looks: "#Quad4 Gravity Remains" (4/27); "The Re-Opening of Risk" (4/28); "Mo vs. Value" (4/29); "Long-term Shorts" (4/30). |
That’s, of course, a quote from The Matrix. It’s also what Greg Zuckerman led off with in the final chapter of The Man Who Solved The Market – How Jim Simons Launched The Quant Revolution.
I’m not Jim Simons. I’m not Neo either. I am just Mucker and I did better yesterday.
How are you doing this morning? How was your family dinner last night? Mine wasn’t as eventful as it was the evening prior. While I have to talk about the score on Twitter (tremendous marketing, eh), I don’t really talk to my kids about winning days.
Back to the Global Macro Grind…
First, thank you for all the feedback on yesterday’s Early Look: Short-term Mistakes. I think one of the big differences (and advantages) my process has is that I’m not just a machine. I have unique behavioral feedback OODA loops that I learn a lot from.
I’ll get to Long-term Short Selling in a second, but just to close the transparency/accountability loop on how my Real-Time Signaling #process did in April, here are my stats:
Yep, with the SP500’s +12.7% bear market bounce in April, I did better on the SHORT side than I did on the LONG side. For those of you who don’t like consistency (players who can bat for average) my MAX gains were greater than my MAX losses too.
My MAX loss on the long side of -9.2% was actually a latent mistake I made buying what our Quad Map said I should buy during the crash in March: S&P Low Volatility (SPLV) exposure. It was a good example of something that didn’t work like it “should” have.
Latent mistakes, or letting losers run, are some of the worst mistakes I ever make.
It’s taken me a long time, lots of reps, and plenty of wine (at night when I remodel everything!), to get less bad at that part of The Game. Since I don’t play well using short-term stop losses, I’m well aware that I always run the risk of letting a loser run.
In a perfectly timestamped world (think Madoff or anonymous people on Twitter), I’d let winners run and cut every loss quick.
In the real-world, where I’m dumb enough to show all of Wall Street (and now Main Street) every single move I make, I do have to have some short-term patience on positions that A) go against me but B) make longer-term sense.
Examples of positions that were short-term going against me in RTA (Real-Time Alerts):
- Long Treasuries (TLT)
- Short Industrials (XLI)
- Short Private Equity (PSP)
On any given moment of the day, there are plenty more! I currently have 22 live positions in RTA. All of those unrealized winners/losers don’t get #timestamped into Dumb Mucker history, until I realize them.
If something, like the Russell (IWM) Short is going against me short-term, what is my intermediate to long-term plan for that position? Well, that’s A/B Tested with two big things:
A) What Quad are we in and does the Quad Map agree that its still a long or a short… and
B) What does my intermediate-term @Hedgeye TREND signal say – does it agree or disagree?
I’m still working hard at maintaining this discipline, but if B disagrees with A then I should stop myself out of the idea/position altogether and move onto the many other positions I could have that satisfy my A/B Test.
If A and B agree, and I’m just getting squeezed short-term within a Bearish @Hedgeye TREND signal, then I press (or on longs I buy more). So, yesterday, I bought more Treasuries (TLT) on sale and shorted more Private Equity (PSP) on the bounce.
Hopefully that makes simple sense to you all. I like simple rules that help me navigate a complex and non-linear ecosystem.
During Deep #Quad4 Deflation, not only is Cash (Long US Dollars) King, but so is being long of low-volatility liquidity (Treasuries, across the curve). Shorting super-late-cycle assets that are both LEVERED and ILLIQUID (Private Equity) are longer-term shorts.
What is a “Long-term Short”? Well, for me that’s not counted in calendar days. It’s counted in Cycle Time. Shorting Small Caps (IWM) from where the US Growth Cycle peaked (in Q3 of 2018) has been as good a Long-term Short as Spanish Equities.
Shorting something super-late-cycle that still goes up until GDP is about to enter a recession (like High Yield Bonds and/or Private Equity) started at the end of January of 2020. How long I stay with these depends on The Gravity of The Cycle.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.56-0.67% (bearish)
UST 2yr Yield 0.16-0.23% (bearish)
SPX 2726-2959 (bearish)
RUT 1139-1370 (bearish)
Healthcare (XLV) 95.76-102.03 (bullish)
Financials (XLF) 19.98-23.62 (bearish)
VIX 30.01-47.95 (bullish)
USD 98.85-101.10 (bullish)
Oil (WTI) 9.60-21.20 (bearish)
Gold 1672--1757 (bullish)
AAPL 256-296 (neutral)
AMZN 2216-2484 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
