Crowding Factors, Continued

“Financial panic narratives have a strong psychological component, and a key concept here is crowd psychology.”
- Robert Shiller 

What happened in the US Bond and Equity markets yesterday didn’t start happening yesterday. Nope. Yesterday was just a day where the consensus crowd freaked. My first risk signal on Momentum, as a Factor Exposure, was on FEB 22^nd, don’t forget.

Understanding both The Machine and The Crowd isn’t new either. The aforementioned quote comes from a chapter in Narrative Economics called “Panic vs. Confidence.” (pg 119)

“By the middle of the 19^th century, Charles Mackay’s popular 1841 book Memoirs of Extraordinary Popular Delusions began to attract public attention to crowd psychology.” Studying that book and the #behavioral side of markets is as old as me playing The Game itself.

Back to the Global Macro Grind…

But how many people really play The Game the way we do? Whose #process is based on these 3 triangles within a Sierpinski Triangle?

1. History (I.e. Time Series)
2. Math (i.e. The ROC, or Rate of Change) and
3. Behavioral Psychology

That’s been exhibit #1 since I founded Hedgeye in 2008. It’s at the very beginning of every Macro Themes presentation we do. The alpha we generated both yesterday and YTD is specifically a function of not being the crowd.

Yeah, I’m so smart. Not really. I’m just smart enough to know that I have no idea when both The Signals (i.e. my volatility math) and The Setup (consensus positioning) are going to … wait on it… signal!

And when those signals signal, I move.

I don’t rationalize or moralize why what’s moving should or shouldn’t be moving – as markets move, I move – and, again, because I’m not as intellectually impressive as many of my competitors, I guess I’m numb enough not to anchor on the “why.”

On FEB 23^rd, my Early Look was titled Momentum Basket Blasted. Then, on:

1. FEB 24 I signaled SELL our QQQ long…
2. FEB 25 I signaled SELL our ROKU long…
3. FEB 25 I signaled SHORT Tesla (TSLA)…

Again, reviewing The Game tape isn’t an exercise in back-slapping. It’s simply a reminder that there should be a flow & pace to your fractally oriented risk management observations and a series of process based decisions born out of that. #OODA!

Prior to that Momentum Basket break-down signal on TSLA (which you all know is both the #1 position in both MTUM and ARKK), I hadn’t issued a SELL Signal (Real-Time Alerts) on TSLA since OCT 15, 2020. I model that thing daily. Why I signaled it on FEB 25 wasn’t random.

And it certainly wasn’t some magical revelation from the valuation gods either. Note, valuation isn’t a pillar of my process. While The Quads are a component of my process, none of these Signals had to do with those either.

I’m going off on this a bit this morning because both my inbox (Institutional Client emails) and Tweeter stream is decked to the max with questions on “why” I’m seeing this in “momentum” now…

This immediate-term feedback I put myself in a position to receive is both a blessing and a curse. It’s a blessing because being in the fishbowl let’s me see the behavior of the crowds. It’s a curse because sometimes it drives me nuts.

Yes, I have feelings too!

But, I won’t let my #behavioral weaknesses get the best of me this morning. Nope. Instead, I’ll do what I always try to do when the crowd is panicking AFTER proactively predictable factor-based moves – I slow The Game down while the crowd’s emotions pick up.

So no more from me on what we already positioned for – just more of the same. Here are my Top 3 Things this morning:

Consensus Crowding Factors in certain parts of the US Equity market are a bigger risk than The Cycle…

1. #NAZVOL – unlike broader US Equity Vol (VIX), NASDAQ Volatility broke out above my Vol of Vol @Hedgeye TREND Signal level of 31.62 (VXN) yesterday – widely owned names like AAPL (with front-month volatility > 41!) that are LARGE CAP with LOW SHORT INTEREST (and tough COVID Comps) are not where you want to have concentrated bets right now – we’ll see if it’s episodic, or not…
2. CHINA – using a FIFO Strategy, I explained why it was First In (went long it in JUN) and why it is First Out (during yesterday’s Macro Themes Update Call) here with China entering #Quad3; Shanghai Comp down -2.1% overnight broke my @Hedgeye TRADE Signal support level for the 2^nd time in a week too
3. CURVE – being long big time Momentum Factor names like TSLA, AAPL, etc. is completely different concentration and positioning risk than being long a Steepener (curve steepened to +133bps wide on 10s/2s yesterday), the Financials (XLF +0.8% yesterday), Energy (XLE +1.5% yest), etc. vs. your Long Bond (TLT), Gold (GLD) and Utilities (XLU) Shorts – don’t be the crowd

And a very happy birthday to my oldest of 3 daughters. My Cal Gal (Callie) turns 11 years old today. While I may indeed panic when she turns Sweet Sixteen, today is not that day. Dad’s got this!

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

UST 10yr Yield 1.29-1.55% (bullish)
UST 2yr Yield 0.11-0.17% (bullish)
SPX 3 (bullish)
RUT 2178-2306 (bullish)
Energy (XLE) 46.45-51.49 (bullish)
Financials (XLF) 31.95-33.98 (bullish)
Utilities (XLU) 57.72-60.45 (bearish)
VIX 19.24-29.85 (bearish)
USD 89.71-91.26 (bearish)
Oil (WTI) 58.75-64.15 (bullish)
Gold 1 (bearish)
Copper 3.93-4.33 (bullish)
AAPL 117-129 (bearish)
AMZN 2 (bearish)
TSLA 621-755 (bearish)
Bitcoin 46,103-54,413 (bullish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer