“He who can no longer pause to wonder and stand rapt in awe, is as good as dead; his eyes are closed.”
My eyes definitely aren’t closed this morning. We are in day 6 of another low-volume, global macro, short squeeze that has expanded its multi-factor wings from Europe to China and back to the US. The interconnectedness of the modern day macro market continues to leave me in awe.
After moves like this it isn’t time to panic - it’s time to pause. Slow down your decision making and take the time to wonder what the potential scenarios are for the next big move. Every Euro Parity Parrot has been squeezed; most in the ‘China is going to zero’ camp have been too – and now the mean reversion associated with a global illiquidity squeeze has the 200-day Moving Monkeys in the US jumping around like they usually do when you throw them a banana.
Standing “rapt in awe” is not what you should do when you see perma-bulls, parrots, and monkeys alike get bullish when they see green on their screens. In the dynamic ecosystem that is the global marketplace, this is a constant. You don’t need fractal math to forecast this kind of proactively predictable behavior.
What you should do is have a risk management plan that’s duration agnostic and changes, real-time, as global market prices do – so let’s go through that in Europe, Asia, and the USA, from both an equity and currency market perspective, using our TRADE (3wks or less) and TREND (3mths or more) durations:
A) Equities – all 3 of my current major leading indicators (DAX, FTSE, and IBEX) are flashing bullish TRADE and TREND as of this morning. Bullish immediate term TRADE isn’t new, but bullish intermediate term TREND is and I’ll need to see that confirm. The FTSE’s intermediate term TREND line = 5351 and this is the first day that we’ve seen that eclipsed to the upside. One day doesn’t a repeatable TREND make, but the German DAX and Spanish IBEX have been trading above their respective intermediate term TREND lines now for almost a full week – so stay tuned.
B) Currencies – most European currencies look outstanding relative to the US Dollar. Both the Euro and British Pound are bullish TRADE and TREND with TREND line support levels for the Euro and Pound at 1.27 and 1.48 per USD, respectively.
A) Equities – leading indicators for the entire region aren’t broadly bullish across both TRADE and TREND durations yet, but China has recently broke out to the upside from an immediate term TRADE perspective (2485 = TRADE line support for the Shanghai Composite) and the Hang Seng in HK has moved to bullish TRADE and TREND with TREND line resistance becoming support at 20,518. Japanese stocks look diametrically different than those in Singapore, Thailand, and HK, with Japan closing down again overnight and remaining broken on both TRADE and TREND durations.
B) Currencies – most Asian currencies continue to look bullish relative to the US Dollar. India raising interest rates by a higher than expected 50 bps last night adds to the hawkish bias that Asian governments have moved towards in recent months (rate hikes in Thailand, Taiwan, Korea, etc). The one thing that can crush their domestic citizenries is inflation. It’s important to understand that inflation, like politics, is local.
A) Equities – all 3 of my current major leading indicators (SP500, XLY, and XLF) look the same – bullish from an immediate term TRADE perspective and bearish from and intermediate term TREND perspective with the following Bear Market Macro levels of TREND line resistance: SP500 = 1144; XLY (Consumer Discretionary) = $32.99; and XLF (Financials) = $15.49. And no, we don’t use the 200 or 50 day Moving Monkeys to make our Macro Theme calls. We use our proprietary multi-factor, multi-duration model with a fundamental global macro overlay that considers country, commodity, and currency risk.
B) Currency – the US Dollar Index continues to look awful from both a TRADE and TREND perspective with TREND line resistance now fortifying itself up at $84.21. Like a stock price for a company, the fiscal health of a country is reflected by the strength of her currency. As the European governments get austere, the US government continues to play chicken with a global game of reflation that is damning both the rates of return on American savings accounts and the currency that backs them.
So, in the aggregate, as we Pause To Wonder what this all means relative to our current positioning, this is what I am going to do:
- Europe – stay away from the short side of European Equities (we have no European equity shorts); get long some European equity exposure (preferably German) on a pullback; and remain long the British Pound (we are long FXB).
- Asia – buy more Asian Equities and Currencies. We are currently long Singapore (EWS) and the Chinese Yuan (CYB).
- USA – short the SP500 all the way up to 1144 (we are short SPY) and remain short the US Dollar (we shorted the UUP on June 7th).
Managing risk doesn’t happen in a price-momentum, performance chasing, vacuum. It’s both global in capital flows and interconnected across asset classes with a Darwinian function that will render long term parrots and monkeys “as good as dead. “ In the short run, our risk management task remains to not lose money and keep your hard earned capital alive.
My immediate term support and resistance levels for the SP500 are now 1088 and 1122, respectively.
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer