Cycle Highs = Bullish

“If you put your feet in the oven and head in the refrigerator, on average you should be comfortably warm.”
- Johan Jensen 

Jensen was a Danish mathematician who passed away in Copenhagen in 1925. He came up with Jensen’s Inequality. And no, he wasn’t thinking social inequality. He explained one of the most basic realities that Linear Econ’s still don’t get today:

“The real meaning of Jensen’s results is that the averages are flawed when effects are non-linear.” - Mark Broadie (pg 90)

In Every Shot Counts, Broadie was applying this to golf. I obviously apply a fractal model to measure and map the non-linearity of macro markets every day. It’s not the average of things that matters – it’s the Similar Sets of particular things.

Back to the Global Macro Grind…

With both Commodities and US (and European) Equities right back up towards their Cycle Highs, welcome to another Macro Monday @Hedgeye here to kick off the month of August.

For those of you who are new to our Full Investing Cycle process, on the first day of the week I review the particular moves in Global Macro that mattered in the prior week – those that are confirming or denying investable @Hedgeye TRENDs.

I like to start where most should pay more attention to the particulars – the Global Currency market:

1. US Dollar Index was down -0.8% last week moving 1-month price-momentum back to negative within its Bearish TREND
2. EUR/USD was +0.8% last week moving it back to Bullish on both @Hedgeye TRADE and TREND durations
3. Japanese Yen was +0.8% vs. USD last week to +1.3% in the last month and moving it to Neutral TREND
4. GBP/USD was +1.1% last week moving it back to Bullish TRADE and TREND as well
5. Canadian Dollar was +0.8% vs. USD as well last week and it remains Bearish TRADE but Bullish TREND
6. Swiss Franc appreciated +1.6% vs. USD last week and moved back to Bullish TRADE and TREND

If you didn’t know that that’s not what the Global Currency market does when the USA is entering an investable #Quad4 period of Deflation (i.e. when the USD is breaking out to the upside), now you know.

The other Big Macro thing that doesn’t happen (unless the USA is heading into #Quad4) are breakouts in the Commodities Asset Class to new Cycle Highs!

1. CRB Commodities Index inflated another +0.7% last week (vs. SPY -0.4%) to +9.2% in the last 3 months
2. Oil (WTI) inflated another +2.6% last week to +18.0% in the last 3 months
3. Copper inflated another +1.9% last week to +4.5% and +0.3% in the last 1 and 3 months respectively
4. Aluminum inflated another +4.0% last week to +3.2% and +8.5% in the last 1 and 3 months respectively
5. Lumber dis-inflated another -2.0% last week to -49.7% in the last 3 months (to +38.1% year-over-year)

I’ll bet you a Burning Buck that 10 out of 10 Macro Tourists couldn’t tell you what the 19 Commodities are in the CRB Commodities Index. Hint: Lumber is not one of them, haha!

Aluminum, Coffee, and Copper are 3 of them though. That’s why they have much heavier mathematical weights in our proprietary US headline INFLATION Nowcast (which continues to tick higher to new Cycle Highs as well).

Back to stocks, if you want to see some real #Quad4 Deflation in Equities prices look no further than our short call on a place called Hong Kong and other EM Asia Equity markets:

1. Emerging Markets (MSCI) deflated another -2.6% last week to -7.0% and -5.2% in the last 1 and 3 months respectively
2. Hong Kong’s Hang Seng deflated another -5.0% last week to -9.6% in the last month alone = Bearish TRADE and TREND
3. Philippines stock market deflated another -3.8% last week to -9.2% in the last month alone = Bearish TREND as well

Nah, you don’t hear much of a peep from the peeps who have been “Bullish on cheap EM” this year. Ex some Oily EM’s like Russia (RSX) and Saudi Arabia (KSA) The Singularity of my Signaling Process has kept me out of EM and short China.

European Equities have been a much better place for Full Cycle Investors to compound returns in 2021:

1. EuroStoxx600 was +0.1% last week to +2.0% and +5.6% in the last 1 and 3 months, respectively
2. Swiss Stocks (SMI Index) were +0.1% last week to +1.5% and +9.9% in the last 1 and 3 months, respectively
3. Germany Stocks (DAX) corrected -0.8% last week to +0.1% and +2.7% in the last 1 and 3 months, respectively

Both last week and the past month have downgraded Germany to #4 on my Strength of Signal Rankings with Switzerland (EWL) still at #1 followed by the Netherlands (EWN) and France (EWQ) in the #2 and #3 slots. Spain (EWP) remains our top Euro Short.

On the US Equity side, the #1 Factor Exposure to have been long during this #Quad2 to #Quad3 Phase Transition has been Long QUALITY (as in Low Debt to Enterprise Value Stocks) = +0.8% last week and +4.3% in the last month.

In #Quad2 you can be long crappy balance sheets. In #Quad3 you’re looking for quality yields like #1 ranked US Sector REITS (XLRE) which were up another +0.4% to new Cycle and ALL-TIME highs last week (+7.3% in the last 3 months of Full Cycle Returns).

All-time is a long time. The average of cycle time, not so much.

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

UST 10yr Yield 1.21-1.42% (bearish)
UST 2yr Yield 0.17-0.24% (bullish)
SPX 4 (bullish)
RUT 2174-2247 (bearish)
NASDAQ 14,519-14,923 (bullish)
Tech (XLK) 150.01-155.97 (bullish)
REITS (XLRE) 45.65-46.91 (bullish)
Shanghai Comp 3 (bearish)
DAX 15,214-15,793 (bullish)
VIX 15.60-20.08 (bearish)
USD 91.67-92.85 (bearish)
EUR/USD 1.175-1.191 (bullish)
USD/YEN 109.20-110.70 (neutral)
GBP/USD 1.362-1.402 (bullish)
CAD/USD 0.78-0.81 (bullish)
USD/CHF 0.90-0.92 (bearish)
Oil (WTI) 68.33-75.92 (bullish)
Nat Gas 3.80-4.14 (bullish)
Gold 1 (bullish)
Copper 4.32-4.68 (bullish) 

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer