“The rule is irresistibly appealing – it’s easy to remember, for one thing.”
- Anders Ericsson
Damn the details when Macro Tourists and Perma Bull CNBC “journalists” can just remember a few one-liners like “don’t fight the fed” or “V-shaped recovery”, eh? Ever hear about the “10,000 Hour Rule?”
As Ericsson goes on to explain in Peak, “Krampe, Tesch-Romer, and I published the results from our study of Berlin violin students in 1993. These findings would go on to become a major part of the scientific literature on expert performers… but it was actually not until 2008, with the publication of Malcolm Gladwell’s Outliers, that our results attracted much attention.” (pg 109)
In other words, the rule A) really isn’t a rule and B) wasn’t Gladwell’s idea to begin with. Especially when risk managing your own money, be careful with Macro generalizations (especially if they come from the Old Wall and its conflict of interest media).
Back to the Global Macro Grind…
Despite a textbook month-end markup in the US Equity market on #decelerating volume yesterday (painting the tape is, technically, illegal – but who cares anymore), something that wasn’t “supposed to happen”, happened.
Both Junk Bonds (JNK) and super-late-cycle and speculative High Yield Bonds got smoked on both an absolute and relative basis (to the FOMO Futures markups).
Why? A: More Sellers Than Buyers
It turns out for Junk (JNK) in particular, at -$1.05 billion worth of investor withdrawals, was the worst day of outflows, ever. And, by our objective Hedgeyes, ever remains a very long time.
But, “don’t fight the Fed”… so why?
For those of your less data-driven friends who don’t want the actual details on The Gravity of The Cycle, all they had to do was read the title of my Early Look last week: “Buybacks Collapsing, Bankruptcies Accelerating.”
Yes, that’s still happening. And yes, Earnings Season still has to happen too.
Why would you be concerned about these things? A: Because the macro market is. While I think plenty of our subscribers would love it if I boiled down all of Global Macro (FX, Rates, Equities, Commodities, etc.) into a few simple Signal or Quad rules…
Some of the time (i.e. most of the time that it really matters) it’s nowhere near that easy.
That’s why I’ve built a multi-duration & multi-factor risk management #process – it’s the only way (for me at least) to consider the fractal nature and singularity of The Cycle’s risk all at once.
There are these things in Fractal Math called Similar Sets – or a collection of causal properties in a non-linear system that are usually, but not always, related. Two super simple ones to have front-center on your dashboard every day are:
- The ROC (rate of change) of Equity Volatility on both a TRADE and TREND duration … and
- The ROC of High Yield OAS Spreads on both a TRADE and TREND duration
Those are two simple statements that are not easily defined, unless you’ve already defined what each part of the statement means in time and space terms:
A) @Hedgeye TRADEs are immediate-term and 3-weeks or less in duration
B) @Hedgeye TRENDs are intermediate-term and 3-months or more in duration
*Former Old Wall User Note: there are no 50 and 200 day simple moving monkeys in these definitions
Just like everything else in my model, as time and space changes, my price/volume/volatility signals (TRADE and TREND signals) do. TRADE and TREND levels for front-month VIX are currently 30.37 and 26.49, respectively, for example.
With High Yield Spreads WIDENING (again) yesterday (+15bps wider to +630bps over Treasuries for HY OAS) and US Equity Volume collapsing on the “up day” (total US Equity Volume was -27% day-over-day vs. Friday’s big stock market down day)…
I’m confident that I saw what was “going on” differently than consensus did yesterday.
As a result of yesterday’s cross-asset class moves, the probability continues to rise that we see an increasing number of both Debt and Equity Bubbles popping during Recessionary Stagflation in Q3 of 2020.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.61-0.71% (bearish)
UST 2yr Yield 0.12-0.19% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
Tech (XLK) 99.98-104.92 (bullish)
Financials (XLF) 22.06-24.07 (bearish)
VIX 30.27-37.78 (bullish)
USD 96.60-97.91 (bearish)
Oil (WTI) 36.41-41.16 (neutral)
Gold 1 (bullish)
Copper 2.58-2.72 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
