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James Cagney in White Heat

“If you don’t do macro, macro will do you.” – Mitchell Julis

Bear market rallies can be fierce. The hope for a bottom ignites a chase, especially when market participants are playing from behind; this only serves to increase exposure when investors should be doing the opposite. That makes this market as difficult as any to risk manage. Especially with central bank charlatans getting squeamish with every point drop in the SP500. Are stocks not supposed to go down in a free market? Is capitalism about protecting the corporation and inflating the cost of living for average people? If growth in the US is so strong, why is the Fed so jittery after the first 10% correction for equities in two years? Can unelected, unaccountable academics, who have never managed real-time macro risk in their lives, defy economic gravity via bubbles?

BREAKING: If you blow a bubble, it will pop.

The largest impact that the Fed, and other central banks have had on financial markets, is the creation of asset bubbles, shortened economic cycles, and enriching the rich. Massive money supply creation has caused enormous currency volatility, which in turn shortens cycles because changes in monetary policy abruptly shift and disrupt the flows of capital, resulting in wild price swings across asset classes.

Context is everything, especially when dealing with Ms. Market. We can’t know where we’re going unless we know where we have been. So let’s add some context to last week’s moves with some help from our Research partner Hedgeye:

With big up days for the SP500 and the Dow, the Russell 2000 closed down on Friday. The Russell was up for the 1st week in 7, but what’s notable is that over 60% of stocks in the Russell 2000 are currently crashing (-20% from their 12-month highs).

Taking into account Ms. Macro’s market message on a baseline 3-factor basis – PRICE, VOLUME, and VOLATILITY, this is what we saw on Friday’s “bounce”:

  1. PRICE – both the SPX and Russell failed at all 3 core levels of @Hedgeye resistance
  2. VOLUME – Total US Equity Market Volume was -11% and -4% vs. its 1 and 3 month averages, respectively
  3. VOLATILITY – VIX was down on the day but +3.5% and +60.3% for the week and YTD, respectively

Across asset classes (multi-factor), here are the other big deflationary forces at work across:

  1. European Equity deflation of -0.9% last week (-2.9% YTD EuroStoxx600)
  2. Emerging Market Equity deflation of -1.9% last week (-3.2% YTD MSCI)
  3. CRB Index deflation of -1.1% last week (-2.7% YTD)
  4. Oil (WTI) deflation of -3.3% last week (-11.1% YTD)
  5. Energy Equity (XLE) deflation of -1.1% last week (-6.6% YTD)

Then, of course, you have risk signals like:

  1. US 10yr Treasury Yield crashing (-27% YTD) to 2.19%
  2. US Treasury Yield Spread crashing (-31% YTD) to +182bps wide (10yr minus 2yr)
  3. And Credit Spreads starting to move off of their all-time lows as equity and commodity volatilities breakout

“We currently do see more red pending in US, European, and Emerging Market Equities in the coming weeks and months. And we don’t think last week’s immediate-term capitulation was the bottom.” – Keith McCullough (Hedgeye CEO)

But consensus does; here’s the updated net positioning of hedge funds in non-commercial CFTC futures/options terms:

  1. SP500 (Index + E-mini) got longer by +5,537 contracts to a net LONG position of +54,153 last week

  2. 10yr Treasury Bond saw shorts get -6,976 contracts shorter last week to a net SHORT position of -58,930

  3. Crude Oil bulls only gave up -14,225 contracts last week, keeping the net LONG position at +285,500 contracts

Is this time different? Why is it that the Fed is content punishing 80% of Americans, while only a relative few profit? Who pushes their agenda and are those your market sources? Who’s getting paid?

Tell me how someone gets paid, and I’ll tell you their biases; and in this case, their crimes. But they’re unelected and unaccountable, and it should be no surprise to anyone that it is rigged this way. This is America.

To reiterate, it is probable that the Fed gets more dovish on the margin as US growth continues to decelerate; this is likely to be initialized via extending their zero interest rate policy, and then via some sort of Ponzi asset purchase or loan program. Note to the Fed:  0 + 0 = 0

The agenda to print and pay themselves is likely to continue until they eviscerate the middle and lower income classes, and/or the people rise up. The question to ask is: At what point does the market become irresponsive to the Fed’s viagra?

As always, Government remains the number one risk to the financial markets, and if the data and research changes my views will adjust accordingly.

 

Alim

Alim

Alim Abdulla is an Investment Advisor at Leede Financial and is a co-founder of the Trading Analytics Group (TAG). He has been with Leede for nine years and began his career in the Financial Industry a year prior at Canaccord Capital. Alim considers himself to be an Active Risk Manager focused on long/short equity portfolios.

Disclaimer: The comments and opinions expressed herein reflect the personal views of Alim Abdulla. They may differ from the opinions of Leede Financial Markets Inc. and should not be considered representative of the research beliefs, opinions or recommendations of Leede Financial Markets Inc. The information included in this document, including any opinion, is based on various sources believed to be reliable, but its accuracy and completeness is not guaranteed. Member CIPF.