“We have now seen that noise can produce costly errors.”
- Daniel Kahneman
With Oil Volatility ramping to 66 and the VIX at 28, I’d say that was a sufficient amount of noise to wake-up to on the day after Thanksgiving. But what did it really mean? Was it different this time? Is it finally time to panic-sell and go to #Quad4?
Well, I have no idea (until I have more cycle time and space). But The People in South Africa apparently think they do. Their stock market was up +0.9% overnight to +3.6% in the last month. That market noise sounds more like mute to me.
As always, I’ll use my TRADE/TREND/TAIL Signals to measure The Cycle vs. the noise. As Kahneman reminded me in Noise, “an important question is how, and how much, bias and noise contribute to error?” (pg 55)
Back to the Global Macro Grind…
Welcome to what is all of a sudden a particularly important Macro Monday @Hedgeye. Remember, it’s not the average or narrative of things that matters most to a Full Cycle Investor – it’s the particular things.
When you consider the noisy Friday move within the context of week-over-week and TRENDING (3 months or more) Full Investing Cycle Returns, it’s a lot easier to see where most narratives out there have no idea either!
Starting with the Global Currency market, last week was pretty much nothingness:
- US Dollar Index moved a whopping +0.1% on the week and remains Bullish on both my TRADE and TREND durations
- EUR/USD was +0.2% last week and remains Bearish TRADE and TREND alongside uber dovish ECB policy
- Japanese Yen rallied +0.6% vs. USD last week but remains Bearish TREND @Hedgeye
- GBP/USD was down -0.9% last week and remains Bearish TRADE and TREND as well
- Turkish Lira crashed by another -9.2% vs. USD last week to -32.1% in the last 3 months
Turkey’s currency crashing during Thanksgiving had nothing to do with Omi-whatever-virus. It had to do with Turkey’s economic cycle. It’s one of the many mounting relative reasons for US Dollar strength.
The big correction in Commodities markets was a particularly important move – was it signal or noise?
- CRB Commodities Index corrected -3.5% taking its 3-month TRENDING return to +4.8%
- Oil (WTI) corrected -10.3% taking its 3-month TRENDING return to +2.8%
- Copper corrected -2.4% taking its 3-month TRENDING return to +1.0%
- Corn inflated another +2.6% taking its 3-month TRENDING return to +6.2%
- Wheat inflated another +0.8% taking its 3-month TRENDING return to +11.8%
- Coffee inflated another +4.1% taking its 3-month TRENDING return to +27.4%
So what was it that made for such a massive divergence between Oil and Ag last week? Don’t you go all conspiracy theorist on me now! What’s the Oil and Copper price doing within the context of their Bullish @Hedgeye TREND signals today?
If the world (or The Cycle) was about to end, why was Gold down another -3.6% last week to -7% YTD?
Heck, if you were long Gold and something like Palladium (we’re not), the latter was down another -14.2% last week taking its 3-month crash to -25.6%. I’ll stay with my Long Coffee (JO) position, thank you.
But, but, how about that 1-day episodic-non-TRENDING move in High Yield OAS Spreads?
A) Oil Volatility ramping to 66 is always going to widen High Yield Spreads... and
B) VIX 28 correlated to that 1-day move in High Yield (on no volume) too
Again, Signal vs. Noise?
We’ll see how markets trade into and out of another #Quad2 US Jobs Report at the end of the week (yes, economic reality like last week’s #Quad2 US Consumer Spending report for October still gets reported on cycle time).
How about stah-ks?!? Here were the Top 3 US Equity Sector Styles in terms of TRENDING Signal Strength:
- Consumer Discretionary (XLY) corrected -3.5% last week, taking its 3-month TRENDING return to +13.2%
- Tech (XLK) corrected -3.1% last week, taking its 3-month TRENDING return to +6.1%
- Energy (XLE) didn’t even correct last week – it was UP +1.7%, taking its 3-month TRENDING return to +15.7%
Yeah, I know. Crazy noise, right? Imagine you bought all 3 of these US Equity Sectors when we made the Asset Allocation call to get long of #Quad2. You wouldn’t have to panic about the SP500 having a -2.4% correction from its all-time high.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.47-1.72% (bullish)
UST 2yr Yield 0.45-0.66% (bullish)
SPX 4 (bullish)
NASDAQ 15,392-16,193 (bullish)
RUT 2 (bullish)
Tech (XLK) 164.08-171.99 (bullish)
Energy (XLE) 54.04-59.21 (bullish)
VIX 14.08-30.31 (bearish)
USD 95.01-97.00 (bullish)
EUR/USD 1.118-1.143 (bearish)
USD/YEN 113.11-115.97 (bullish)
GBP/USD 1.327-1.354 (bearish)
Oil (WTI) 68.02-84.49 (bullish)
Gold 1 (bearish)
Copper 4.26-4.58 (bullish)
Bitcoin 53,105-65,020 (bullish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
