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Early Look: Waking Up

“I hear and I forget. I see and I remember. I do and I understand.”
-Confucius
 
Managing risk up here on the high-wire of a global US Dollar Devaluation move is what it is – a daily and athletic exercise of doing. I hear the American commoner’s disgust. I see the bankers getting paid. I trade around everything I see and hear, as I try to understand.
 
Trying to make sense of an interconnected global macro system of colliding dynamic factors isn’t for everyone. Neither is trading. Or at least doing macro and managing risk weren’t given parts of the investment process in years prior to 2008. That’s when a long/short stock picking hedge fund monkey like me could make money in a market that went straight up alongside access to capital. That’s changed.
 
Every day we wake up to slug it out with a global macro consensus. Sometimes consensus isn’t bullish enough. Sometimes it’s so nauseating that you can only fade it. Sometimes it isn’t bearish enough. Consensus is the backbone of the market’s being. Embrace it, daily, and you begin to understand.
 
My daily risk management process includes the measurement of ranges, deltas, and spreads. If there is something we can attempt to quantify on those 3 scores, we do.
 
One of the weekly sentiment indicators that was shining bright red on my screens yesterday was the Institutional Investor sentiment survey. The spread in that survey was one of the most bullish we have measured in well over a year. The spread between Bulls to Bears widened to +21 points (for the Bulls).
 
The most interesting part of the math was how bombed out the Bears were. Less than 4 months ago almost 50% of the respondents in that II survey were outright bearish (at the bottom). In this week’s report, only 26% of investors admitted they are bearish anymore (at the top).
 
My understanding here is quite simple – and it’s no longer that investors aren’t bullish enough – investors aren’t allowed to be bearish! When your director of research or master of the hedge fund universe PM rains down on you every morning for missing the latest daily market move, you end up in a box. You end up with embedded rules that govern your analytical output – it’s called career risk management. Sometimes you just aren’t allowed to be bullish or bearish. That’s obviously a problem.
 
So with the Chinese and US stock markets pinned up here at YTD highs and people not being allowed to be bearish anymore, what do you do? I think the best option is to wait and watch. All the while, keep measuring your ranges, deltas, and spreads. Patience provides opportunity.
 
I know, for Mr. Qualitative Research Superstar… this part of the investment process probably makes you laugh. Trust me, there are a lot of people out there just like you. I used to be one of them. Evolving your investment process should be a perpetual exercise in doing.
 
So let me take you through some of my basic training global macro calisthenics this morning and flash you some US market factors:
 
1.      I have the SP500’s daily range of price probability at 43 points = tight and trade-able (bullish)

2.      I have immediate term TRADE support/resistance for the SP500 at 989-1,010 = risk barely outrunning the reward (bearish)

3.      I have the daily spread for the VIX at 3.15 points = volatility remains broken across durations (bullish)

4.      I have the daily delta for NYSE volume expanding = 1st day in the last 14 where that came on a market down day (bearish)

5.      I have the daily spread of the US market’s breadth deteriorating = one day does not a TREND make (bearish)

6.      I have 9 out of 9 SP500 sectors in my quantitative model signaling positive TRADE and TREND = (bullish)

 
Now let’s flip over to a cross section of asset class and geographical considerations:
 
1.      China closed down another -2.1% overnight, taking its 2-day decline from the YTD high (+92%) to -3.3%

2.      Australia shot up another +1.4%, 2-days AFTER signaling that their next move in interest rates is UP

3.      Germany is up +0.4% again this morning and continues to lead mature western European economies despite a 1.44 Euro

4.      Turkey, a beacon for emerging market growth, is flashing a big daily negative divergence this morning, trading down -2.5%

5.      The US Dollar made a new low yesterday trading below 77.50 on the US Index

6.      The CRB Commodities Index made a new YTD high yesterday, trading up to 268

 
So where does this all wash out? You tell me. We all have different investment styles. We all have different durations. I don’t wake up in the morning trying to be everyone’s banker or politician. I don’t wake-up trying to be bullish or bearish. I wake-up trying my best to do, and to understand.