Green & Yellow Lights

“We are all made for every moment we encounter.”
- Matthew McConaughey 

Indeed, we are. In markets, our decision making #process is made for every buy/sell order we execute too. Sometimes yellow lights turn into red ones. Other times we run that yellow and “feel” the best we have all day. #Greenlights

“Whether the moment makes us or we make the moment… whether we are helpless in it or on top of it – the predator or the prey… we are made for that moment.” (pg 141)

The middle aged American Irishman, McConaughey, wrote that down in his notebook before auditioning for the role of Jake Brigance in the 1996 drama, A Time To Kill. What’s in your notebook this morning?

Back to the Global Macro Grind…

For those of you who have seen my notebooks, there is both a #process and a pace to my note taking. Every night before I go to bed, I spend my work-time, pre-loading 2 pages of notes with incoming data, tickers, and catalysts.

Every morning, usually from 430-6AM ET, I spend my work-time, filling up those 2 pages.

One page is all Macro – the other page is all tickers. No offense to the companies or the ETF manufacturers, but they’re all just signaling tickers to me. And on this day in 2020, some of them went bright red.

Today, of course, is the anniversary day of the largest point drop in the history of the Dow and the 2^nd worst percentage loss on record at -12.9%. How do I know that? It’s in my notebook. I write every macro market price down.

Some people ask me why? Why write the bloody things down? Well, that’s easy. That’s how I learn. It’s how I deliberately absorb and study EVERY number so that I don’t have a bias towards WHAT number is going to matter at particular times.

Sandpile theory, eh. #Greenlights

Actually, there are red, yellow, and greenlights in the Abelian Sandpile model. “Also known as the Bak-Tang-Wiesenfield model” it was the 1^st “discovered example of a dynamical system displaying self-organized criticality.”

That epic learning was pre A Time To Kill via a 1987 white paper. All of my studying and reading about chaos and complexity theory came post my graduation from Linear Econ school in 1999.

Then came Fractal Signals, Pods, and Quads. #Greenlights

And this morning, I do it all over again. Some of last week’s Yellow Lights turned green. Some former Yellow Lights have turned red. That’s the thing about lower-highs – sometimes they particularly matter; other times they don’t.

As I tried to explain last week, lower-highs (Yellow Lights) are either:

A) A simple signal of consolidation (which both SPY and IWM proved to be last week)… or
B) The beginning of the end of a @Hedgeye TRADE or TREND

Or, as I call them, @Hedgeye Phase Transitions (i.e. when something changes from Bullish to Bearish TREND or vice versa) which are similar to the physical processes of transition in nature. At first they happen slowly, then all at once.

What are some of this morning’s US Green Lights (i.e. Signaling higher-highs within Bullish @Hedgeye TRENDs)?

1. Broad US Equity (SP500) with immediate-term upside in my Risk Range to 4,004
2. SMALL CAP (Russell 2000) with immediate-term upside in my Range to 2395
3. Energy (XLE), Financials (XLF), Industrials (XLI), and Basic Materials (XLB)
4. Oil (WTI) with immediate-term upside in my Risk Range to $67.57 (WTI)
5. UST 10yr Yield with immediate-term upside in my Risk Range to 1.67%

In other words, if you encountered a “rising rates are bad for stocks” narrative, you should have faded that and bought our favorite 4 Signaling Sectors when you saw some red lights (down days). Chasing them on green lights is for the crowd.

What are some of this morning’s Global Macro Yellow Lights in my notebook?

1. NASDAQ with immediate-term upside in my Risk Range signaling a lower-high at 13,624
2. Dr. KOSPI (South Korea) and the Nikkei 225 (Japanese Stocks) signaling lower-highs
3. Dr. Copper, down -1.6%, signaling consecutive (daily) lower-highs (now at $2.22/lb)
4. EUR/USD signaling consecutive lower-highs within its Bullish @Hedgeye TREND  
5. USA’s Consumer Staples (XLP) and Utilities (XLU) signaling lower-highs within their Bearish @Hedgeye TRENDs 

Yep, playin’ a little gotcha with myself there with that last one… just because I can… and because I’m running out of Clock-Time to get this note out so that I can move on to the next part of my process (shaving, then listening to The Call)…

When something is signaling lower-highs within Bearish @Hedgeye TRENDs like Utes, Gold, and the Long Bond (TLT) are again this morning, those are called Red Lights. I love shorting those on bounces to lower-highs.

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

UST 10yr Yield 1.47-1.67% (bullish)
SPX 3 (bullish)
RUT 2124-2395 (bullish)
NASDAQ 12,502-13,624 (neutral)
Energy (XLE) 50.01-55.02 (bullish)
Financials (XLF) 32.99-35.23 (bullish)
Utilities (XLU) 57.90-63.96 (bearish)
Nikkei 287 (bullish)
VIX 18.43-29.26 (bearish)
USD 90.75-92.51 (bearish)
EUR/USD 1.182-1.209 (bullish)
Oil (WTI) 61.90-67.57 (bullish)
Nat Gas 2.45-2.77 (bearish)
Gold 1 (bearish)
Copper 3.95-4.22 (bullish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer