“Market crashes typically have an indelible date that imprints the event for future generations.”
- Jim Rickards
#Quad2 in Q2 is getting boring, so I figure I’ll just start writing about crashes and maybe sell some more subscriptions. The problem with that view is that every month, for the last 5 months, we’ve had US stock market corrections to capitalize on.
The US stock market will crash at some point. Timing that matters though. And my track record on “calling” those isn’t as bad as most. The history of crashes is something everyone in The Game should be aware of. As my friend, Jim Rickards reminds us:
“Black Friday, September 24, 1869, is the date an attempted gold-market corner by Jay Gould and Big Jim Fisk collapsed. Black Monday, October 28, 1929, was the date the Dow fell -12.82% in one day, triggering what became the first Great Depression.” -The New Great Depression, pg 45
Back to the Global Macro Grind…
While some levered long hedge funds have crashed this year, the US stock market hasn’t. The SP500 closed at an all-time high only 3 trading days ago. Post a 2-day correction it’s down an eye-watering -1.9% from its current #Quad2 Cycle Peak.
Was Friday’s SPX close of 4232 THE peak?
Gold recently saw it’s Cycle Peak in AUG of 2020 and is currently in the midst of a -12.7% Full Cycle Drawdown from there. I don’t read anyone panicking about Gold other than where they need to “get in”, however.
The Panic of 2021 continues to be in US Equity futures and options contracts, not the index price:
A) SP500’s (index + e-mini) latest net SHORT position is -19,070 and I’m betting that just got shorter in the last 2 days
B) Russell 2000 (mini) latest net SHORT position was -22,885 contracts and that scores -1.79x on a 1-year z-score
While I’d bet a lot of money that a lot of people who “trade” this market know what the 50-day Moving Monkey is but not a 1-year z-score and/or what to do with either, let’s not waste time on amateurs this morning. That’s why you pay for this.
One critical way to contextualize panic and/or fear in market positioning is through the lens of futures & options contracts:
A) Anytime a macro position heads towards -2.0x on a 1-year z-score, the crowd is afraid…
B) Anytime implied volatility in that position moves towards +40% or higher, vs. 30-day realized panic is in puts too
When BOTH of these things are happening at the same time, it’s safe to assume that:
A) Consensus is positioning for a broader drawdown in the market’s price… OR
B) Consensus just got pounded and has been forced to “de-gross” and/or de-lever
Since LIQUIDITY and LEVERAGE are going to be causal factors during the next US stock market crash, you should absolutely respect those risk management Factor Exposures.
That said, confusing a small group of fund managers seeing their performance crash with The Cycle crashing has been a mistake.
Where is this IMPLIED VOLATILITY of > +40% that your data-driven process tweets of?
A) SPY’s Implied Volatility just ramped to a +61% PREMIUM vs. 30-day realized (vs. a -16% DISCOUNT only 1-month ago)
B) IWM’s Implied Volatility just ramped to a +39% PREMIUM vs. 30-day realized (vs. a -19% DISCOUNT only 1-month ago)
And what was happening 1-month ago to generate those complacency (bulls chasing) & capitulation (shorts covering) signals (i.e. double-digit IMPLIED VOL DISCOUNTS)? A: 10 all-time closing SPY highs in the month of April.
Oh, right, but now its “Sell In May And Go Away.” Imagine you sold INFLATION (Commodities), as an Asset Allocation, at the end of May of last year? lol
What’s also interesting about this uniquely American stock market panic (in positioning) is that you literally can’t see it in Commodities, at all:
A) Yesterday’s 207 closing price for the CRB Commodities Index was yet another new Cycle High … and
B) Basic Materials (XLB) stocks inflated another +0.3% on the SPY correction day to +21.3% YTD
Are you up +21.3% YTD like one of our 4 Horsemen is (XLB)? Are you long of Copper (inflating another +0.8% this morning to another Cycle High of $4.80/lb) and Freeport (FCX)? Or are you long of Cathie’s ARKK?
While I’m still registering day 2 of a NEUTRAL set of @Hedgeye Signals on Tech (XLK) and the NASDAQ (QQQ), I’m registering big buy-the-damn-dip signals in Financials (XLF), Retailers (XRT), and Industrials (XLI).
There is, of course, no more dip to buy in European Equities this AM (they opened flat to up – still long EWL, EWG, etc.). But, again, you don’t see the panic positioning in Europe because that’s not where US hedge fund leverage and liquidity problems are.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.57-1.72% (bullish)
SPX 4136-4237 (bullish)
RUT 2190-2307 (bullish)
NASDAQ 13,219-14,167 (neutral)
Tech (XLK) 133.18-142.17 (neutral)
Energy (XLE) 50.22-54.69 (bullish)
Financials (XLF) 35.88-38.20 (bullish)
DAX 145 (bullish)
VIX 16.02-23.22 (bearish)
USD 89.81-91.14 (bearish)
Oil (WTI) 63.61-66.32 (bullish)
Nat Gas 2.85-3.02 (bullish)
Gold 1 (bearish)
Copper 4.36-4.83 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
