The Re-Opening of Risk

“I shall drag the United States in.”
- Winston Churchill

That’s what Ole Winnie told his levered-long son Randolph while shaving at the top of the risk management morning in late 1940. “In America, the public had no interest in being dragged anywhere, least of all into a war in Europe.” -The Splendid and The Vile, pg 25

Post America’s war with the virus, everyone is going to get dragged into the US stock market though. Post-virus, eh? As in all of the crashes, drawdowns, and risks realized in portfolios is gone now, right? Don’t think about it, just “feel” the FOMO…

Is the “market” signaling that it’s all clear and “safe” to sell your core, Full Cycle Investing, Asset Allocations US Dollars, Gold, and Treasuries… and chase some story stock charts like some of your friends did back in February? It isn’t on my signals.

Back to the Global Macro Grind…

What I know about my inbox, twitter-feed, and Macro Show queue of questions is that lots of people have lots of “feelings” when it comes to the FOMO. It’s a uniquely American thing. It’s amazing to watch. Bubbles are always amazing.

While it was only last Tuesday when all I did was fade my feelings, buying “stocks” and covering my shorts, today is a new day. Instead of post-2-down-days of people feeling bearish, we’re post-2-up-days for FOMO Futures, and consensus is feeling the momo again!

My personal accounts don’t have feelings, but they pretty much lost money across the board yesterday. Long positions in Dollars, Gold, and Treasuries (across the curve) were all down yesterday, and US Equity Beta was straight up.

Here are my Top 3 summary points from 6AM EDT on that:

Been a while, but I got ran over by US stock market FOMO yesterday – happens, onto the next…

1. OIL – there’s no FOMO in either Oil (or Commodities broadly, with CRB Index -43% since JAN) with WTI down anywhere between another 5-20% depending on the minute you looked at it today – with Oil Volatility (OVX) ramping back towards 200 (not a typo), this opens up the immediate-term downside towards $8.40/barrel as Deep #Quad4 Deflation takes hold
2. RUSSELL – I shorted more IWM with it up almost +5% on the day yesterday – that move was led by the regional bank stocks (KRE was +7% at that point), so I shorted those too – been a while since we’ve seen Small Caps and Fins lead a FOMO rally but it’s not a new TREND ($2B bank WSBC is down -23% pre market on earnings reality)
3. 10YR – what would get me bullish about some Small Cap and Bank stock Factor Exposures? A) Quad 2 and/or B) the bond market signaling a change in @Hedgeye TREND – quite the opposite signaled yesterday with the top-end of my UST 10yr Yield Risk Range dropping to a lower-high of 0.69% and HY OAS Spread barely moving 1 basis point on the day = +774 over

Yep, it’s onto the next. After missing both #PeakCycle and #GrowthSlowing, I guess the “re-opening” bulls who are chasing FOMO this morning are thinking we’re onto the next economic cycle? I really don’t know what they’re thinking, and I particularly don’t care.

Looking at the rest of my notes that didn’t make it into the Top 3:

1. US Equity Volatility – low end of my @Hedgeye Risk Range = 31.94 VIX
2. Totally US Equity Volume - #decelerated -8% vs. the 1-month average on yesterday’s bounce to lower-highs
3. The 3-day range in my SPX model is 169 SP500 points wide
4. Two of the best looking Factor Shorts (Small Cap and Financial Leverage) bounced most yesterday
5. HY OAS Spread basically didn’t move during yesterday’s SPY FOMO, going out at +774bps over
6. FX Volatility didn’t move either at 9.58 and the US Dollar remains Bullish @Hedgeye TREND
7. Japanese Stocks didn’t chase the US FOMO with the Nikkei down -0.06%
8. Chinese Stocks (Shanghai Comp) didn’t chase the US FOMO either, closing down -0.20%
9. Australian Stocks closed down -0.13%, showing no interest in “reopening” during its 1^st recession in over 30yrs  
10. Spanish Stocks opened down (again) then bounced, but are -33% since peaking on the same day SPY did in FEB

I know, who cares about all of the line items in my notebook when Goldman can tell you a story that negative earnings, debts, etc. don’t matter anymore and you just need to buy stocks?

Heck, especially if you’re “feeling” it, I say you go for it this morning and chase! For my money, it was a lot harder making a SELL the FOMO call 2 months ago than it is this morning. Today’s call is relatively easy to make.

It’s not hard watching US Equity Futures rise while I type this either. If that wasn’t happening, I’d have no reason to write to you about doing the opposite of what I did last Tuesday.

Immediate-term @Hedgeye Risk Range with TREND signal in brackets:

UST 10yr Yield 0.56-0.69% (bearish)
SPX 2 (bearish)
RUT 1152-1295 (bearish)
NASDAQ 8 (neutral)
Consumer Staples (XLP) 57.25-60.74 (bullish)
Healthcare (XLV) 94.74-102.51 (bullish)
Financials (XLF) 20.11-22.80 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 181 (bearish)
VIX 31.94-47.36 (bullish)
USD 99.02-100.92 (bullish)
Oil (WTI) 8.40-18.03 (bearish)
Gold 1683--1780 (bullish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer