“I have never seen an astrologer who was lucky at gambling, nor were those lucky who took their advice.”
- Girolamo Cardano
Did you lose money yesterday? How much of your recent gains did you give back? Even after booking gains, did you still have too much “gross exposure” to winners that were going straight down?
These are all questions that you should be asking yourself this morning. Analyzing your performance in particular moments is critical. There’s a big difference between great “stock pickers” in names with price momentum and great portfolio managers of real-time risk.
The aforementioned quote comes from Konnikova’s The Biggest Bluff. Cardano is considered the “father of probability who saw trusting luck as a vague sort of power as pointless – he offered another way: prediction through probabilities” (pg 43)…
Back to the Global Macro Grind…
Cardano would be a really old dude if he was around to teach you about probability weighing your capital at risk. Even Shakespeare got his point on risk management…
“Cardano’s Consolation was the book originally held by Hamlet in the ‘to be or not to be?’ scene.” -Konnikova
Yet, apparently, even some of the best power-users of our #process forgot some of the most basic rules of gross exposure yesterday. It’s almost as if they forgot what kind of “bucket” (I won’t use swear words here) of volatility they were in when VIX ramped above 30!
As a reminder, almost no one makes money on a US Equity market down day when the VIX rips through 30… unless, they took their:
A) Gross market exposure way down (before and into the move)…
B) Then moved to net SHORT (at the portfolio level of the entire book)… and then
C) Pressed their shorts on the open yesterday like I did (IWM and XLF #timestamped)
Since I’d been writing about it (and ranting about it on The Macro Show) for the last week, I did those things (because that’s what I was telling you I was doing)… and you know what I was up yesterday? Three basis points.
Three, as in +0.03%.
Holy hyena you are a bloody hero, Mucker! Ha. Nope. Not at all. I just wasn’t the PM who was either down -3% on the day or worse. I did my #1 job, preserving and protecting my family’s hard earned capital, when many others were losing a lot of theirs.
Now if you have friends reading this who will never subscribe to our process because it is either too advanced (in volatility adjusted return space) and/or in direct conflict of interest with their bs TINA (there is no alternative to stahks!) marketing, that’s fine…
But for my money and yours, I want you to get better at this. You absolutely have to learn from days like yesterday.
If you made 3 basis points or lost 2/3 of the gains you had in the 2-3 days prior, you have no choice but to A) learn from you did and why and B) make the best, probability weighed decisions you can today.
With that, here are my Top 3 Things:
- USD (short) – on the inverse correlation risk we managed (timing matters) to US Dollars, I think you’re good to go again here this morning, buying Commodities, as an Asset Class, in particular (which are currently safer, in Vol space, than many stocks!); either a bad employment report or more Fed/Fiscal stock market bailout plans are US Dollar Devaluation catalysts
- OIL (long) – alongside Nat Gas (inflating +1.2% this AM) was a better thing to buy on sale than many stocks, sector ETFs, etc. yesterday, mainly because it was at the low-end of its Risk Range (whereas those other things, largely, we not); Copper +1.3%, Corn +1.2% this AM too – instead of the joke that was TINA, its TAAS (there are alternatives to SPY)
- VOLATILITY (long) – since the probabilities changed (vol of vol signals) in the last week of a breakout in US Equity Vol, you should have A) been proactively prepared for that move and B) ready for what to do next if this epic cluster of uniquely American Equity Volatility is TRENDING > 30 VIX, > 31 VXN, and > 27 RVX (the regime of Russell vol never changed!)
Yes, the Top 5 Gross Long Exposures (positions) in my portfolio yesterday (SHY, TLT, IVOL, LQD, and GLD) were 42% of my total gross long exposure mainly because:
A) We had a massive buying opportunity in Fixed Income in the last week and my Fixed Income positions have a MAX weight of 10% of my capital (Equities have 6% MAX, Commodities 4%)
B) My “go anywhere” Asset Allocation strategy allows me to go to where the puck is going instead of being grossly exposed to where it has already been (On the Macro Show I explained why I was cutting my Long Tech, XLK, position to 0.5%)
And this wasn’t to make 3 basis points. It was to not lose all of the gains in both Commodity and Equity Longs (my Top 3 Equity positions all tapped the top end of my Risk Ranges on Wednesday = XLK, XLU, and XLRE) I’d busted my butt for.
This note isn’t to say I’m all that. To the contrary, it’s to challenge you to be the best that you can be. This isn’t about Mucker The Crystal Ball Astrologist inasmuch as The Game is not about being Macro Proctologists rattling off “returns” from March 23 lows.
This note is about doing my part to help coach you into being better at this. You don’t have to like your coaches but, believe it or not, you need risk management coaches. And the people divining on CNBC about their momentum stock picks aren’t it.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.59-0.71% (bearish)
SPX 3 (bullish)
RUT 1 (bearish)
NASDAQ 11,245-12,099 (bullish)
Tech (XLK) 116.17-127.82 (bullish)
REITS (XLRE) 35.38-36.99 (bullish)
Utilities (XLU) 58.10-60.55 (bullish)
Financials (XLF) 24.25-25.55 (bearish)
VIX 24.94-35.61 (bullish)
USD 92.00-93.31 (bearish)
Oil (WTI) 40.95-43.90 (bullish)
Nat Gas 2.41-2.75 (bullish)
Gold 1 (bullish)
Silver 25.75-28.99 (bullish)
Copper 2.91-3.08 (bullish)
Bitcoin 11,175-12,048 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
