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    A Decade of Revolution Declare Your Research Independence

“A market is never saturated with a good product, but it is very quickly saturated with a bad one. ”
-Henry Ford

On this day in 1981, the IBM Personal Computer was introduced. Don’t worry, Apple’s intermediate term TREND line of $257.93 may very well have broken yesterday on an accelerating volume and volatility study (bearish), but I’m not going to go there on Mick’s Cupertino versus PC.
I am going to take this puck right up the middle on American financial innovation however. Despite this industry being able to concoct gnarly synthetic securities for broker dealers to drive trading commissions over the last decade, conventional risk management products have gone by the way of horse and buggy whips. This poses systemic risk to the US financial system.
When I call them the 200-day Moving Monkeys, I’m not trying to be funny. I’m calling out a serious risk to all of your 201Ks. “Breaking the 200-day yesterday” is what I witnessed way too many people in the Manic Media citing yesterday as to why the market was going lower. If using a one-factor model (price of a moving average) is where risk management has evolved to in 2010… America, we have a problem.
The 200-day moving average was heralded in the 1970’s by the author of the “Telephone Switch Letter”, Richard Fabian (he used a 39-week moving average). Like Hedgeye’s Early Look, this was a successful newsletter product that charged a subscription fee. Unlike our Early Look, this one-dimensional trend following product was delivered by the mail man when there was no such thing as an internet connection.
Almost 40 years later, we have a multi-media platform on our desks with multiple trading screens, real-time media piping into our flat panel TVs and people pinging us via text, twitter, and email on our handhelds as our real-time quotes download across our risk management spreadsheets…
All the while, conventional wisdom is to take all of this technological innovation, set it aside, and react emotionally to the one line the monkeys are hanging on – the 200-day moving average for the SP500 at 1115…
Thank God for groupthink.
Since 1981, the asset management industry has obviously used things like personal computers to evolve. There are plenty of fantastic risk managers out there on the buy-side. Sure, we all make a living picking off the Manic Monkeys in both the media and on the sell side, but this doesn’t come without market risk. Conventional wisdom getting caught off-sides can cause collapse.
Yesterday’s -2.8% collapse in the SP500 can be explained using a multi-factor and multi-duration risk management model that spans countries, currencies, and commodities worldwide. So let’s get with 2010 this morning and use some computers and this great product called Excel to grind through the Real-Time Risk Management Early Look:
1.      Asia

-China closed down another -1.2% last night (taking its week-to-date loss to -3.1% and YTD loss to -21.4%) after the Chinese government reported more of the same in terms of what we’ve coined the Chinese Ox In a Box (Chinese demand has been slowing for 6 months as inflation has accelerated and the Chinese government tightens the screws on speculative borrowing). If you’d like our in depth note that we published on Chinese demand yesterday, please email sales@hedgeye.com.

-Japan closed down another -0.86% last night dropping the world’s 3rd largest economy back into the doldrums that are born out of quantitative easing. Japan’s Nikkei Index is now down -13% YTD.

-India’s industrial production slowed markedly in June to +7.1% versus 11.3% in May and the Bombay Stock Exchange closed flat on the news. The BSE Index remains in a bullish intermediate term TREND position, much like Indonesia and Singapore do (Hedgeye remains long both via the EWS and IDX etfs).


2.      Europe

-UK’s FTSE Index is breaking down below its intermediate term TREND line of 5252 this morning.

-Germany’s DAX is trading modestly lower, but holding its intermediate term TREND line of 6078 this morning.

-Switzerland, Netherlands, and Denmark are all flashing positive divergences versus both the European region and Asia/USA.

-Euro is down at $1.28, holding its bullish intermediate term TREND line of support of $1.26.

-British Pound (which we bought back yesterday on weakness) has stabilized at $1.56 and has no upside resistance up to $1.61.


3.      North and South America

-Mexico remains broken from an intermediate term TREND perspective, but we covered our short position in the Mexican etf (EWW) yesterday as it was oversold from an immediate term TRADE perspective (Mexican stocks have been down for 7 of the last 9 days).

-Brazilian currency and equities sold off hard yesterday and we took the -2.1% down move in the Bovespa as a buying opportunity in Brazil’s etf (EWZ) as the bullish intermediate term TREND line of support in the Bovespa continues to hold at 64,402.

-US Equities got wrecked yesterday, closing down for the 9th day out of the last 12, reminding the bulls that QE2, QE3, or QE4 is probably not what they should be begging Bernanke for. A disastrous US Dollar combined with structural unemployment and ominous bond yield signals are no recipe for long term American success.

Altogether, we covered 3 short positions in the Hedgeye Virtual Portfolio yesterday (Mexico (EWW), Blackstone (BX), and Royal Caribbean (RCL)) and we bought 3 long positions (British Pound (FXB), Brazil (EWZ), and Foot Locker (FL)).
We don’t think any of these moves have much correlation to the 200-day Moving Monkeys other than realizing that their bad risk management product gave us a behavioral buying opportunity.
My immediate term TRADE lines of support and resistance for the SP500 are now 1080 and 1110, respectively. Buy low, sell high.
Best of luck out there today,