“Every step of the way I was wrong. About everything.”
- Mark Manson
Many people like it when I say or tweet something like that after a bad market day. I’m not sure why, but I’m guessing that’s because most people they hear from are not transparent and accountable about mistakes. They don’t have down days.
That’s probably why Manson’s book, The Subtle Art of Not Giving A F---, became a #1 New York Times Bestseller. Not everyone wakes up in the morning assuming they are wrong about a lot of things. Manson is a self-effacing Millennial, btw.
In a great chapter he titled “You’re Wrong About Everything (But So Am I)”, Manson reminds us that “500 years ago, cartographers believed that California was an island… scientists believed that fire was made out of something called phlogiston… and Astronomers believed that the sun revolved around the earth.” (pg 115)
Back to the Global Macro Grind…
No matter what you believe to be true about markets, the best part about The Game is that there’s an undeniable score at the end of every market day. The last price was the truth. Markets don’t lie – people do.
Yesterday’s US Equity market day was one of the most interesting of the 2021 Season. Not because of what the index (SPY) did on the day, but what the Sector & Factor Exposures did inside of the market intraday.
Look at these #divergences at the Sector Level:
A) Energy (XLE) +2.5%, Basic Materials (XLB) +0.7%, Industrials (XLI) +0.7%, Financials (XLF) +0.4%
B) Communications (XLC) down -2.5%, Consumer Discretionary (XLY) -1.5%, Tech (XLK) -1.2%
Since all 4 of those Sector Styles that were up on the day are our Top 4 Signal Strength Longs right now, that meant I didn’t get my teeth kicked in, on that front, yesterday. Consensus that remains long of Mega Cap “names they know” did.
Then, looking at Factor Exposures, here were the big #divergences of the day:
A) LOW SHORT INTEREST was up +0.1% vs. HIGH SHORT INTEREST down -1.2%
B) HIGH YIELD was up +0.2% vs. LOW YIELD down -1.1%
Since, I am long of plenty of higher short interest stocks, that’s where I got something else kicked in yesterday. Obviously the newsy down day for Gamestop (GME) had plenty of US Retail (XRT) High Short Interest Factor exposure baskets for sale.
On high vs. low yield, I’m not talking about bonds. Those are Equity Factor Exposures. Interestingly, but not surprisingly, HIGH YIELD’s OAS Spread (a measure of cross asset class risk) was DOWN -5 basis points on the day to +325bps over.
Altogether, the Macro Market’s message, from a Sector & Factor Exposure perspective was simply that being long of The Cycle continues to get you paid, whereas being long of the crowd’s consensus positioning at particular points in The Game doesn’t.
And what do you learn from all this scoring of the game within The Game? A: Be Macro and Factor Aware.
And, while you are at it, like my good friend Floki from Vikings taught me, humbly submit to the gods – the market gods of price, volume, and volatility, that is… embracing the uncertainty that, at any given point in The Game, you can and will be wrong.
Let’s define ‘wrong’ using my TRADE, TREND, and TAIL durations:
A) Immediate-term TRADEs are often head-fakes … but sometimes the beginning of new @Hedgeye TRENDs
B) Intermediate-term TRENDs are 3-months or more in duration… and they usually keep trending
On the long-term TAIL duration (3 years or less), just be Macro Aware of the big stuff like the sun doesn’t revolve around the earth and “rubbing dog urine on your face has anti-aging benefits” (Manson, pg 115!).
Using the aforementioned SHORT INTEREST Factor Exposure, what is the TRADE vs. the TREND?
A) HIGH SHORT INTEREST stocks are -4.8% in the last week but up +15.3% and +44.6% in the last 3 and 6 months
B) LOW SHORT INTEREST stocks are -0.8% in the last week but +6.3% and +23.1% in the last 3 and 6 months
In other words, up until the last week, since #Quad2 (growth and inflation accelerating, at the same time) started economically in November, the HIGH SHORT INTEREST bears were wrong, pretty much every step of the way, for the right economic reasons.
Is this recent -9.6% correction in the Russell 2000 (from the all-time closing high it just made on March 15th) a TRADE or the beginning of a new @Hedgeye TREND? I think it was a quick correction, not a new #Quad4 TREND. But what do I know?
If I am wrong on that, I will be very publicly wrong. That would be great actually. That will force me to change both my positioning and my mind faster. There’s nothing more healthy than learning, quickly, from one’s mistakes.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.56-1.76% (bullish)
SPX 3 (bullish)
RUT 2104-2405 (bullish)
NASDAQ 12,844-13,542 (bullish)
Tech (XLK) 128.07-134.42 (neutral)
Energy (XLE) 46.55-54.11 (bullish)
Financials (XLF) 32.90-35.03 (bullish)
Shanghai Comp 3 (bearish)
Nikkei 28154-30631 (bullish)
DAX 140 (bullish)
VIX 18.39-23.48 (bearish)
USD 91.20-92.65 (bearish)
EUR/USD 1.180-1.201 (bullish)
GBP/USD 1.368-1.404 (bullish)
Oil (WTI) 57.13-67.86 (bullish)
Gold 1 (bearish)
Copper 3.94-4.19 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
