“It’s a tough game.”
- Jerrold Fine
For those of you who don’t know him (I don’t), Jerry Fine was one of the original hedge fund pioneers who co-founded Steinhart, Fine, Berkowitz & Co. Then he launched Charter Oak in the town where I’m raising my family (Westport, CT).
The aforementioned quote comes from Fine’s recent book on both life and rising up in this game – it’s called Make Me Even And I’ll Never Gamble Again. One of my favorite mentors in markets, Jon Dawson, sent it to me as a gift.
Like Dawson (Princeton), Jerry was an Ivy Leaguer (Penn). This is what he thought about book-smarts: “All the stuff you’re going to learn in Ivy Land matters in the long-term, but it can get you into deep doo-doo if you don’t listen to the market.” (pg 65)
Back to the Global Macro Grind…
For those of you who have never stepped in it, doo-doo is a technical pattern for $hit. In Greenlights, the tell-all Irish Texan who used to live in a trailer had life-thoughts about that too:
“We step in $hit from time to time… stepping in it is inevitable, so let’s either see it as good luck, or figure out how to do it less often.” -Matthew McConaughey
Now, if you don’t want that pattern on your shoe every day, let’s start with some Jon Dawson and Jerry Fine basics of making money, risk managing markets:
A) Buy low
B) Sell high
If you didn’t do B at last week’s all-time SPY highs, you weren’t in as good a position to do A with people panic-selling yesterday. That’s why we wild “trader” types trade around (or risk manage) our positions.
No, no, no. You don’t sell ALL of your position. That’s rookie. You sell-some on green (25 to 50 basis points of each position – thank you for that lesson, Jon)… so that you can buy-some back on red.
And, if you just want to buy-and-hold, do that. To each their own.
There are plenty of ways to run either your own or OPM (other people’s money) in markets. The art of running other people’s money is having money to manage. So you better have a #process that you can both sell and execute on profitably.
I get plenty wrong… but when I am right, here’s a basic lesson on how I execute with discipline on A) and B):
A) I buy (longs) and cover (shorts) when something is at the LOW end of my @Hedgeye Risk Range … and
B) I buy/cover BIG when consensus is net SHORT and buying the crap out of protection
Yes, buy-the-crap is also a very technical term you’ll learn as you play The Game.
It’s actually what makes the difference between someone making money and someone making a lot of money when they are right – how BIG did you buy at the LRR (low-end of the Risk Range)?
I’ll struggle with that until I’m on the wrong side of the grass. Why? Mainly because I stay with my process. My process defines MAX size by position. That said, going big (to my max) has been plenty enough to feed my 4 kids in Westport.
Enough about the basics. What did you do out there yesterday? It was not a day to do nothing:
A) SPY, QQQ, and IWM all sold off towards the LEoRR (low-end of their respective Risk Ranges)… and
B) Implied Volatility PREMIUMS blew out to the upside as consensus clamored for protection
That’s not a narrative of just words. Here are the numbers on that:
A) Low-end of the SPY Risk Range = 3672 (for IWM, Tech, QQQ, etc. they’re all published at the end of this note)
B) Implied Volatility on SPY ramped to a +97% PREMIUM vs. 30-day realized!
To put that in English (some people really need the words!):
A) Consensus either sold the intraday lows near the low-end of the Risk Ranges … and/or
B) Bought protection (puts) against their long books …
Or… they were net SHORT coming into the day and pressed those shorts. That’s not a qualitative statement like the Old Wall Journal will make on “retail positioning” or the NYT on “valuations” ether. That’s where non-commercial CFTC positioning was:
A) Net SHORT SP500 (and E-mini) contracts was -14,406 contracts SHORTER week-over-week at -32,641 contracts
B) That’s registers a 1yr z-score of +0.21x and no where in the bloody area code of “froth”
And no, you don’t need to go to Penn or Princeton to know what a z-score is. You need to have a process that measures and maps real-time market positioning data both in the moment and relative to where it came from, if you want to go big.
Correction on that, you don’t have to do anything to go big. People do it all of the time – it’s called gambling. And I’ll ride Jerry’s wisdom on that too:
Make Me Macro Aware (of where the market is) And I’ll Never Whine About The Smell of Stepping In Doo-Doo Again.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.91-0.97% (bullish)
SPX 3 (bullish)
RUT 1 (bullish)
NASDAQ 12,675-12,954 (bullish)
Tech (XLK) 127.34-131.04 (bullish)
Energy (XLE) 37.15-439.47 (bullish)
Financials (XLF) 28.35-29.72 (bullish)
Utilities (XLU) 60.21-62.50 (bearish)
Gold Miners (GDX) 34.40-38.98 (bearish)
VIX 20.15-28.13 (bearish)
USD 89.45-90.60 (bearish)
Oil (WTI) 47.00-49.12 (bullish)
Gold 1 (neutral)
Copper 3.50-3.62 (bullish)
AAPL 127-137 (bullish)
Bitcoin 26,279-32,905 (bullish)
Bets of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
