“Sailors have a great expression about the weather: they say it’s a great bluffer.”
- E.B. White

That was part of a letter that one of the best American storytellers of his generation sent to someone who had lost faith in humanity. Long after he authored Charlotte’s Web in 1952, it was his Letter to Mr. Nadeau in 1973.

E.B. White could have been a tremendously positive and optimistic writer for Wall Street and Bank Stocks. “Things can look dark, then a moving monkey breaks out in the cloud, and all is changed…” Or something like that…

I’m a non-fictional writer. And a perpetual forecast for rainbows and puppy dogs can be a great bluffer too.

Short Tech, Banks, Or Both? - 10.13.2020 indefensible position cartoon

Back to the Global Macro Grind…

The thing about the 1970s and its damning #Quad3 Economic Stagflation is that you really needed to tell yourself fiction to buy “cheap bank stocks” with the SP500 on its way to 7-8x earnings.

I wrote part of my Senior Thesis on this in the late 1990s in New Haven, CT. I was fascinated with how even Warren Buffett couldn’t quite wrap his head around stagflation, initially.

What is Stagflation for human beings?

A) When the REAL cost of living is rising (inflation) and
B) REAL economic growth (nominal growth minus inflation) is #slowing

What is Stagflation for companies?

A) When your costs (inputs and labor) are inflating and
B) Your revenues are decelerating = margin compression

That’s why a protracted period of margin compression (1970s) perpetuates multiple compression. MMT fans beware.

No worries on that this morning, especially with the Russell 2000 trading at 28x an Old Wall 2021 EPS number that’s too high with banks (largest sector in the Russell) understating loan loss reserves like JPM did yesterday.

What Global Macro markets were much more concerned with yesterday wasn’t #Quad3 Stagflation – it was #Quad4:

  1. US Dollar Up
  2. US Treasury Yields Down
  3. US Financials (XLF) Down

Shorting the Financials at every lower-high has been as easy as buying US Treasury Bonds (across the curve) at every higher-low in 2020. If that’s the only macro move you’ve consistently made, with XLF -18.7% YTD, well done.

The toughest short to time in #Quad4 is Tech (XLK).

Not only because 2 stocks (MSFT and APPL) make up 40% of the Sector ETF (XLK) and everyone and their brothers and sisters own them… but really because shorting bubbles is just a hard thing to do, until they start popping again.

Instead of just writing about that, I’m a big fan of doing. Yesterday I shorted Tech (XLK) for the 10th time in 2020:

A) Prior to yesterday, the last time I shorted Tech (XLK) was on SEP 4th, 2020…
B) Prior to that, I hadn’t shorted Tech (XLK) since April 7th, 2020…
C) And my batting average shorting Tech on 9 opportunities in 2020 = 100%

Not bad for a Mucker who’s “always bearish”, eh? I hope it’s ok to be transparent and accountable like this. Sometimes I get it right. Sometimes I get it wrong. But I always have a rules-based process signaling these risk management decisions.

While I made the #Quad4 in Q2 call at the end of January of 2020, I didn’t short Tech (which is a SELL in #Quad4) for the 1st time until March 2nd, 2020. Why? Again, timing matters. That’s why I built The Signaling Process.

Shorting Tech between March 2nd and April 7th of 2020 was like shooting fish in a barrel.

And if MAGA market CAP Tech (XLK) fails at a big lower-high here, I think shorting it is going to be a lot easier than yesterday’s decision was. Shorting something that’s still going up isn’t easy.

But KM, you idiot, didn’t you know about Apple’s 5G thing?

Yep, hearing that was a secret. Did AAPL hodlers hear about Apple Volatility (VXAPL) ramping to 50 on 5G yesterday? If you polled 1 MILLION Hoodies who own AAPL, what % of them would know what the vol of vol is, never mind signaling, on AAPL?

Apple Vol 50 is a big reason why #NazVol (NASDAQ Volatility) closed at 34.48 yesterday. I could have shorted QQQ yesterday instead of Tech via XLK. But I didn’t because QQQ is the Hedge Fund community’s consensus hedge against FAAMG longs.

The other big thing that went alongside Tech (XLK) signaling A) a lower-high vs. its all-time bubble high from back in AUG was B) an implied volatility DISCOUNT of -12% vs. 30-day realized. That’s uber complacent options pricing into earnings events.

Immediate-term @Hedgeye Risk Range with TREND signal in brackets:

UST 10yr Yield 0.63-0.83% (bearish)
SPX 3 (neutral)
RUT 1 (bearish)
NASDAQ 10,902-11,984 (bearish)
Tech (XLK) 113.24-124.38 (bearish)
REITS (XLRE) 35.50-37.43 (bullish)
Utilities (XLU) 59.40-64.94 (bullish)
Financials (XLF) 23.44-25.71 (bearish)
VIX 24.15-30.72 (bullish)
USD 92.95-94.44 (neutral)
EUR/USD 1.16-1.18 (neutral)
Oil (WTI) 37.21-42.01 (bearish)
Gold 1 (bullish)
MSFT 200-224 (neutral)
AAPL 107-124 (neutral)

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

Short Tech, Banks, Or Both? - CoD Price up  Vol Up