“I think, therefore I am.”
- Rene Descartes
Like many former (failed) hedge fund managers, Descartes was an unbelievably intelligent human being with ambitions beyond the imaginations of most. He thought the world was going to be the way he thought it should be.
I’m a little slower than that. I deal with risk managing both the market signals and economic data I have. Shockingly, that’s contrarian. You can go back over 400 years and see that plenty who have failed in markets relied solely on things like algebra.
Algebra and valuation are cool to know but, when used to make conclusions about the future, they are very dangerous. As Steven Strogatz reminds us in Infinite Powers, algebra is linear and systematic. It “suffers from emptiness and its symbols are vacuous.”
You don’t want to be vacuous using simple Moving Monkeys as “signals”, do you?
Algebra’s assumptions “meant nothing until they were given meaning… there was nothing to visualize. Algebra was left-brained and mechanical… together with geometry though, they were unstoppable.”
“Geometry gave algebra meaning. Lush jungles of geometric flora and fauna waited to be discovered, catalogued, classified, and dissected” (pg 98). Then came the non-linear risk principles of fractal geometry… and we Hedgeye people found an even better way.
Back to the Global Macro Grind…
So what are you thinking from here?
Your performance from yesterday is, therefore you are. No matter what you thought could or should happen, that’s what happened. Now you have to deal with making the next best position, timing, and sizing decisions you can today.
Top down, being long Commodities, Treasuries, and Tech all generated plenty of Full Investing Cycle alpha yesterday. Bottom up, my analysts had our subscribers in names like Zoom (ZM), Nautilus (NLS), and Chewy (CHWY). Those worked too.
On the “names”, there are plenty of useless opinions out there on what “valuation makes sense.” They think, therefore they might “feel” intellectual. I think whoever scores more than the other team wins The Game.
Valuation isn’t a catalyst. It’s an opinion. The ROCs (rates of change) and returns are facts.
So, given the facts, here’s what I am thinking from here (my Top 3 Things note to premium Institutional subscribers at 6AM):
- USD (short) – textbook bounce off the low-end of the @Hedgeye Risk Range both intraday (yesterday) and this morning matters more than anything else in Macro today; for now its EUR/USD -0.4% from the top-end of it’s Risk Range, GBP/USD -0.3%
- COMMODITIES (long) – seeing the commensurate & and inversely correlated correction via the USD bounce – Silver and Nat Gas correct -1.9% from the top ends of their Risk Ranges – Ag corrects too with Corn and Wheat -0.8-0.9%. Patience is a critical part of the #process – wait & watch for the next USD SELL signal
- VOLATILITY – cross asset class divergences are particularly important to observe here with both Oil and Gold Vol breaking down (that’s bullish for the price of both on a @Hedgeye TREND duration basis) whereas Russell Volatility (RVX) breaking out towards 32-33 (bearish for IWM); watching NASDAQ and APPL Vol closely today too
Notice on the conditional factoring of volatility that there’s a lot more noticing than there is knowing.
Again, how I use both my left (algebraic math) and right (fractal geometry) brain isn’t for everyone. Unlike many, I’m just being transparent about how I think about my risk management decision making #process:
A) Bottom-end of my Risk Range I cover and/or buy
B) Top-end of my Risk Range I short and/or sell
All the while, I’m OODA Looping (Observe, Orient, Decide, and Act) for the next opportunity as delivered to me by the market Gods (as opposed to telling the market that I either am God or doing God’s work!).
Digging into some fauna and flora in Vol space, here are some real-time observations:
A) Both CRB Commodities Index and Oil Volatility (OVX) continue to break-down with OVX testing 31 today
B) Gold Volatility (GVZ) dropped towards 23 yesterday – that’s Bullish for Gold, from the low-end of its Risk Range
C) Treasury Bond Vol (MOVE Index) corrected towards 44 yesterday, giving long-term Treasuries (TLT) an alpha day
D) Russell Vol (RVX) closing at 32.15 gives me a short selling opportunity in IWM around 158
E) SPX Vol (VIX) closed right @Hedgeye TREND resistance of 26 yesterday and could easily pull back to 21-22 from here
Going back to the poker table analogies I’ve been using to help you with your probability-weighted decision making #process, those ABCDE’s are 5-cards I have today. They aren’t the cards I told the dealer to give me.
For me, playing the risk-adjusted-return alpha game is never about the “Value” (IWN) or Financials (XLF) cards I “could” have if there’s a magical dealer “rotation.” It’s always about playing The Game that’s in front of me.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.59-0.76% (bearish)
SPX 3 (bullish)
RUT 1 (bearish)
NASDAQ 11,570-11,999 (bullish)
Financials (XLF) 24.18-25.65 (bearish)
VIX 22.04-28.29 (bearish)
USD 91.95-93.39 (bearish)
EUR/USD 1.18-1.20 (bullish)
GBP/USD 1.31-1.34 (bullish)
Oil (WTI) 42.09-43.60 (bullish)
Nat Gas 2.36-2.78 (bullish)
Gold 1 (bullish)
Silver 25.70-29.05 (bullish)
Copper 2.93-3.07 (bullish)
MSFT 221-234 (bullish)
AAPL 118-137 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
