Cycle Time

“We have been conditioned to think of time as linear.”
- Aidan McCullen

But… “ancient cultures perceived time as cyclical.”

And, as McCullen goes on to explain in Undisruptable: “Cyclical time works perfectly for the concept of the infinity curve; cycles suggest there is no end, just the beginning of the next cycle.” (pg 51)

He calls it cyclical time. I call it Cycle Time. In measuring and mapping terms, it’s the same stochastic (non-linear) modeling #process. “Valuation” doesn’t tell The Cycle when to “end.” The next Quad and Phase Transition begins when it begins.

Back to the Global Macro Grind…

Welcome to another Macro Monday here at Hedgeye! For those of you who are new to our proprietary process, welcome aboard. On the 1^st day of every week we contextualize the prior week’s Global Macro moves within TRADEs and TRENDs.

I like to start with the Global Currency market. Last week was a big one for the US Dollar, especially relative to unmet hawkish BOE (Bank of England) rate hike expectations and ongoing dovishness from the ECB:

1. US Dollar Index ramped +0.86% on the week moving to Bullish @Hedgeye TRADE and Neutral @Hedgeye TREND 
2. EUR/USD was down another -1.1% last week and moved to Bearish on both my TRADE and TREND durations
3. Yen was -0.5% vs. USD last week and remains Bearish TRADE and TREND
4. GBP/USD dropped -0.6% last week to -1.3% in the last month and is also Bearish TRADE and TREND
5. Canadian Dollar fell -0.8% vs. USD last week, breaking @Hedgeye TRADE support, moving to Neutral TREND
6. Philippine Peso was up another +0.9% vs. USD last week to +2.1% in the last month = Bullish TREND

Why am I paying attention to the Philippines currency?

A) In a fractally oriented Global Macro Risk Management #process, I pay attention to everything
B) I’m currently long the Philippines (EPHE) Equity market and it’s currency is signaling #Quad2

We’ll see if this short-term move in USD vs. the Canadian Dollar holds. That’s why I use both TRADE and TREND durations. There are plenty of short-term (TRADE) head-fakes that do not confirm TREND changes.

We have Canada (EWC) in #Quad2 in Q4 as well. The Canadian stock market was up another +1.5% last week to +6.5% in the last month. Both my Signal & Quad say buy-the-damn-dips there.

With the US Dollar Up I’d expect to see Commodities Down last week. Ex-Oil and Nat Gas, #nope:

1. CRB Commodities Index inflated another +0.9% last week taking its TRENDING 3-month return to +9.3%
2. Oil (WTI) corrected -0.6% last week taking its TRENDING 3-month return to +18.6%
3. Copper inflated +2.8% last week after breaking out (again) above my TRADE level of resistance
4. Corn inflated +4.1% last week after breaking out (again) above my TRADE level of resistance
5. Coffee (long JO) inflated another +7.5% on the week, taking its TRENDING 3-month return to +15.4%

The move in Ag was interesting in the sense that something like Wheat ended up being one of the most consensus BEARISH bets in futures and options terms prior to last week’s +6.3% inflation. Wheat is now up +10.9% in the last month.

We never know precisely “why” inflations and/or deflations are happening, but we have written frequently about Fertilizer Costs ramping to +180% year-over-year (last week) driving part of this Ag Inflation move.

The Bond Market obviously sees INFLATION #accelerating (i.e. #Quad2 is the only Quad where the short-end of the yield curve breaks out like UST 2yr Yields have – they were +11 basis points on the week to +0.51%), but Gold didn’t see it as #Quad2.

That’s obviously interesting not only because I wasn’t expecting Gold to ramp +2.9% on lagging REAL YIELDS “news” (when you print new Cycle Highs for INFLATION and subtract that high print from the long-end of the curve, it’s just math).

But, as a good Bayesian Boy knows, the market does not care what I expect… and I’ll be watching Gold vs. Rates closely.

In contrast to Gold (which I expected to act like Utilities in #Quad2, i.e. bad) on the US Equity front, the market’s Sector Style message remained crystal clear last week:

A) Utilities were down another -0.9% on the week with bond yields up (XLU’s 3-month TRENDING Return is -2.3%)
B) Tech (XLK) was up small +0.1% vs. SPY -0.3% with a TRENDING 3-month Return of +8.5%

Obviously being positioned “defensively” here during #Quad2 in Q4 has ruined the year-end quarter for whoever made those Asset Allocation decisions back in September. That said, I don’t do calendar-year-macro. I do Cycle Time.

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

UST 10yr Yield 1.45-1.65% (bullish)
UST 2yr Yield 0.38-0.56% (bullish)
SPX 4 (bullish)
NASDAQ 15,546-16,104 (bullish)
RUT 2 (bullish)
Tech (XLK) 162.02-170.25 (bullish)
Utilities (XLU) 66.05-67.64 (bearish)                                                
VIX 14.31-18.98 (bearish)
USD 93.39-95.38 (neutral)
EUR/USD 1.142-1.164 (bearish)
USD/YEN 112.80-114.56 (bullish)
GBP/USD 1.331-1.364 (bearish)
CAD/USD 0.792-0.810 (neutral)
USD/CHF 0.907-0.923 (bearish)
Oil (WTI) 78.47-85.29 (bullish)
Gold 1 (bullish)
Copper 4.29-4.49 (bullish)
Bitcoin 60,364-69,203 (bullish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer