From #Quad2 Week To Contagion?

“There’s another set of cognitive skills that might matter more: the ability to rethink and unlearn.”
- Adam Grant 

This isn’t the first #behavioral book of Grant’s that I’ve studied or cited. He’s 40 years old now but he was the youngest tenured professor at Wharton at 28. He thinks differently:

“When people reflect on what it takes to be mentally fit, the first idea that comes to mind is usually intelligence. The smarter you are, the more complex problems you can solve… yet in a turbulent world” that doesn’t always work. -Think Again, pg 2

For over 20 years playing The Game, I’ve become almost too comfortable not knowing “why.” I know that I don’t know what the market knows. Most importantly, I don’t wake up to every market day telling the market what it should think.

Back to the Global Macro Grind…

Welcome to another Macro Monday @Hedgeye where people really need to know why! Why did the US stock market just have a #Quad2 week and is now in full blown narrative “contagion” (for at least the next 3-6 hours of trading)?

If their answer is China and/or Evergrande, that’s fine. We’ve been short China since Q1 and I didn’t need to know that.

What I need to know is what the Global Currency market was signaling last week:

1. USD Index popped back up towards the top-end of its Risk Range™ Signal last week but remains Bearish TREND
2. EUR/USD corrected -0.7% towards the low-end of its Risk Range™ Signal last week but remains Bullish TREND
3. Japanese Yen barely budged -0.1% vs. USD last week and remains a Neutral @Hedgeye TREND
4. GBP/USD corrected -0.7% last week and is still holding onto Bullish @Hedgeye TREND support
5. Russia’s Ruble was up another +0.3% vs. USD last week and remains Bullish @Hedgeye TREND
6. South Africa’s Rand was down another -3.5% vs. USD last week and remains Bearish @Hedgeye TREND

Other than that South Africa remains in #Quad4 in Q3 and both its stock market (down -8.5% in the last month alone) and currency are signaling Bearish TREND, what else do I need to know? Do I need to be the world’s “expert” on South Africa?

What do you need to know about Russia? Unlike South Africa, Russia is in #Quad3 in Q3. And Russia isn’t China in #Quad3. Russia’s stock market loves Oil & Gas inflating:

1. Russian Stocks (RTSI Index) were up another +1.2% last week towards new Cycle Highs and +3.3% in the last month
2. Oil (WTI) inflated another +3.2% last week taking its 1-month price momentum back up to +8.5%
3. Natural Gas continued to have an epic inflation, up another +3.4% last week to +32.6% in the last month

I know. If you back all of that out, inflation isn’t TRENDING.

But if you’ve had the ability to rethink inflation as the Commodity Inflation has broadened, globally, you’ll note that while the US Dollar was up +0.66% last week:

1. CRB Commodities Index (19 Commodities) inflated another +0.8% towards new Cycle Highs for inflation
2. Cocoa (NIB) inflated another +2.4% for #HedgeyeNation, taking its 3-month Full Cycle Return to +9.7%
3. Oats inflated another +10.1% and Lumber reflated another +4.3% last week

Remember the days when CNBC Macro Tourists were calling out a “falling Lumber chart”? Last week’s Lumber inflation took its 1-month price-momentum to +33.3% (not a typo)… and now all you hear are crickets.

So “why” am I calling last week a #Quad2 week and not #Quad3? The difference between those two Quads is NOT inflation falling. Those are the two Quads with INFLATION #accelerating. During a Quad Shift from 3 to 2:

A) Gold goes down (it was down -2.3% last week taking 1-month price momentum to -2.1%)
B) Utilities go down (they were down -3.0% last week taking 1-month price momentum to -4.0%)… and
C) The Long end of the Yield Curve (10yr Yield) goes up – UST 10yr Yield was back up to 1.36% last week

No, that’s not what’s on your screen this morning. That’s not the point of having episodic-and-non-TRENDING panic attacks about short-term Counter @Hedgeye TREND moves btw. The point is contextualizing particular moves within TRENDs.

Some other #Quad2 USA moves to consider from last week:

A) Russell 2000 was UP +0.4% on the week taking 1-month price momentum to +2.7%
B) Energy Stocks (XLE) were up +2.7% last week taking 1-month price momentum to +2.7% as well
C) High Yield OAS Spread fell another -5 basis points to +274bps over Treasuries

For those of you who have really smart friends who got their faces ripped off by that #Quad2 ramp in both US interest rates and High Short Interest SMALL CAP stocks during #Quad2 in Q4 of last year into #Quad2 in Q1, our numbers trumped their narratives. It will be interesting to see where they go on “contagion” narratives this morning.

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

UST 10yr Yield 1.27-1.41% (bullish)
UST 2yr Yield 0.20-0.26% (bullish)
SPX 4 (bullish)
RUT 2 (neutral)
NASDAQ 14,860-15,480 (bullish)
Utilities (XLU) 65.39-69.28 (neutral)
Energy (XLE) 46.59-51.46 (bullish)
Shanghai Comp 3 (bearish)
VIX 16.06-22.44 (bearish)
USD 92.06-93.45 (bearish)
EUR/USD 1.170-1.188 (bullish)
USD/YEN 109.15-110.40 (neutral)
GBP/USD 1.366-1.388 (bullish)
Oil (WTI) 67.40-73.67 (bullish)
Nat Gas 4.58-5.61 (bullish)
Gold 1 (bearish)
Copper 4.10-4.45 (neutral)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer