“But for its costliness and dangers, no better education for life could be devised than the gambling table.”
- Clemens France
“Feeling” it yet? Got that Strong Buy Pizza Rating impulse? With the US Dollar inverse correlations running this high, why wouldn’t you be rolling the bones on some more Gold, Commodities, or… wait on it.. Stahks!???
The aforementioned quote comes from a classic book from 1902 called The Gambling Impulse. Maria Konnikova used it in a fantastic #behavioral and risk management book I read while on vaca: The Biggest Bluff – How I Learned To Pay Attention, Master Myself, and Win.
Have you mastered your emotions and decision making #process yet? I haven’t. I’ve been try to teach it to both myself and you since starting Hedgeye in 2008. I’m grateful for the opportunity to learn, out loud, from all of my mistakes, every day.
Back to the Global Macro Grind…
The biggest macro mistake one could have made since early June is to have missed the highly correlated impact of US Dollar Devaluation on US #InflationAccelerating.
On a 30-day duration (i.e. the short-term momentum duration that The Machine chases the most):
- USD inverse correlation to Commodities (CRB Index) is highest at -0.97
- USD inverse correlation to Gold is still epic and elevated at -0.93
- USD inverse correlation to SPY is less impressive but still very high at -0.82
Yep, get the Dollar right, and you’ve gotten pretty much everything big in macro that matters right, since June.
With SPY still signaling Bullish @Hedgeye TREND (because the VIX is still signaling Bearish @Hedgeye TREND, i.e. < 26), it was finally able to join our preferred #Quad3 Long (NASDAQ) and make a new all-time closing high yesterday.
If it’s a narrow or “normal” #Quad3, SPY isn’t a short. The Financials (XLF) are. They busted (again) yesterday too.
Despite the all-time highs in NASDAQ and SPY, the Russell 2000 (IWM) and Financials (XLF) are still down -10% and -20%, respectively, from their Cycle Highs. If the US economy was in #Quad2 (i.e. Real GDP Growth #accelerating, that wouldn’t be the case).
Not unlike in Konnikova’s preferred game (poker) not all portfolio hands you held yesterday could have been pot (alpha) winners:
A) Short US Bank Stocks (KRE)? They were down -3.0% (not a typo) on the all-time SPY high day
B) Short Small Cap Value (IWN)? They were down -1.7%
C) Short High Beta (SPHB)? As a Factor Exposure, that hand lost -1.6% on the day too
So why be the SPY Monkey (it was +0.2% on the day) at the table chasing Old Wall talking points and a couple of pairs when you could have been long higher-ranked macro hands like a straight or a flush?
Heck, imagine you had a Straight Flush yesterday?
A) Short US Dollar to fresh 3-month lows
B) Short mainline US Financials (XLF) down another -0.7% on the day
C) Long Treasuries (TLT) +0.7% on the day
D) Long Gold (GLD) +0.9% on the day
E) Long Software Stocks (IGV) +1.2% on the day (beat QQQ +1.0%)
That’s right, baby! Don’t worry about whatever the other players at the table are marketing to you as an asset management product or strategy. Play your #process out and 5 cards in macro sequence like that are all in the same #Quad3 Stagflation Suit!
Most importantly, don’t get piggy here. While a Royal Flush can beat that hand (mix in some Long Chinese Growth Stock exposure yesterday, like KWEB +1.5%, for example and/or Buffett Long Barrick (GOLD) this week… and now we’re talking Stahhhks!)…
The only hand that matters today is playing the next one.
That’s right. What happened yesterday, or since June… or since the beloved Macro Proctologist March 23rd “low”… does NOT matter. What matters today are the next moves you make in order to:
A) Preserve and protect the money you’ve made… and
B) Compound returns tomorrow
On that score, with the US Dollar Index signaling immediate-term TRADE #oversold within its Bearish @Hedgeye TREND, booking some gains in both Gold and Commodities is what you should be doing here (so that you can buy more back on sale when the crowd folds).
Rate Sensitive Longs look like the best bets to call: Long Treasuries (TLT), Investment Grade Bonds (LQD), and Utes (XLU) would be the 3 of a #Quad3 kind I’m holding in size (rather than selling some) this morning.
We’ll see if I can work that into a Full (Investing Cycle) House. If not, I play the next hand tomorrow.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.51-0.71% (bearish)
SPX 3 (bullish)
RUT 1 (bearish)
NASDAQ 10,777-11,278 (bullish)
Tech (XLK) 110.55-116.35 (bullish)
Utilities (XLU) 59.52-61.76 (bullish)
Financials (XLF) 23.98-25.58 (bearish)
Shanghai Comp 3 (bullish)
VIX 20.61-28.20 (bearish)
USD 92.13-93.90 (bearish)
Oil (WTI) 41.13-43.44 (bullish)
Nat Gas 2.06-2.45 (bullish)
Gold 1 (bullish)
Silver 25.04-29.70 (bullish)
Copper 2.79-3.03 (bullish)
Bitcoin 11,420-12,150 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
