“One should never mistake pattern for meaning.”
-Iain Banks
We wanted to spend some time today digging into the red lights that are flashing in the Dow Gold Ratio. Currently, it's below its 200-day moving average and has broken its MACD Trend on the 50-day Oscillator with an Inverse Giraffe Pattern forming . . . and by now you probably know I’m joking.
The stock market business is a fascinating one. There is always someone who claims to have solved the market with some fancy new pattern, signal, or theory. Conversely, we believe the market is a chaotic system at its roots. So, while there may be similar sets, the linear patterns don’t really fit.
Take the 50-day moving average as an example. Many technicians would tell you it’s time to sell when a stock or market breaks its 50-day moving average. In fact, the opposite of this “rule” is true. Buying the SP500 after it breaks its 50-day average is a money maker roughly 72% of the time over the next thirty days.
One of my personal favorite stock market indicators is the Sport Illustrated Swimsuit indicator. This indicator is based on the nationality of the model on the cover. It suggests that when the model is from the United States, the SP500 outperforms its long run average. Conversely, when the model is not American, the SP500 underperforms.
According to a recent study, the results of this indicator are as follows:
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“The average annual return of the S&P 500 has been 8.87% over the last 30 years. When it was an American model gracing the cover, the returns spiked to 13.9%, and with non-American models, the returns lagged at 7.2%.” |
But if you are going to use the Sport Illustrated indicator, you probably need to know the global asset that is most correlated to the SP500. Well, according to a study from the Center of Innovative Financial Technology, that asset is Bangladeshi butter production . . .
The point of all of this is to show that there is lots of noise in the markets. The more we tune it out, the better we are at playing the game and settling into a state of flow that allows us to execute on our process.
Back to the Global Macro Grind…
This morning we get the U.S. river card on inflation . . . the monthly CPI report for November. Headline consensus is at +0.7% M/M. If the headline report comes in at consensus, that would be good for +6.7% Y/Y which is the highest reading since 1982. Since the Biden administration was jawboning down the report yesterday, that might be a decent inside look that it will be a hot report.
The reality is that we also have an easy November comparison. Specifically, back in 2020, which is a lifetime ago in these markets, November CPI accelerated only 0.18% from October. From a comp perspective, they begin to get very challenging in Q1 of 2021, which underscores our call for decelerating inflation.
But even if today’s report is hot, we are already seeing inflation slow in real-time data and in global inflation readings:
- In November, Oil was down about ~-14% and the CRB Index was down more than -5%;
- The Manheim Index for used cars decelerated from 234.8 to 232.5 in the second half of November;
- In our most recent apartment rental rate tracker, the November data started to show the beginning of disinflation in rental growth in Sunbelt markets;
- China PPI decelerated in November to +12.9% from +13.5% in October;
- This morning German’s inflation rate decelerated -0.2% M/M; and
- Japan’s PPI today decelerated to +0.6% M/M from the prior reading of +1.2% in October.
Could CPI accelerate this morning? Sure! But practically speaking, we are already seeing the signs of a topping of inflation. Furthermore, any acceleration now will increase the probability of a deceleration in Q1. And we know what decelerating inflation and accelerating growth means . . . #Quad1 Goldilocks!
Speaking of which, housing equities and subsectors have their best performance in #Quad1. Coincidentally, our housing team is doing their quarterly update on housing this morning (ping if you want access). We track the housing market closely and have noted that it has already started to accelerate from the lows of the early summer. In the attached Chart of the Day, you can see this in detail via pending home sales.
The biggest challenge for housing is that inventory remains at historically low levels. Currently, months supply nationally is at about 2.30 months, which remains near 40-year lows. Obviously, this remains positive for prices, but is also indicative of strong demand and the need for home builders to expand and grow supply.
On that note, housing starts are still some 32% below peak. So we have a long way to go before they hit peak levels, especially given the low inventory situation. The fundamental environment remains very positive for housing stocks and the two best #Quads are #Quad1 and #Quad4 for housing, which are the highest probability outcomes for H1 2022.
And we like probabilities, not cartoon patterns.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.35-1.59% (neutral)
UST 2yr Yield 0.46-0.76% (bullish)
SPX 4 (bullish)
NASDAQ 14,992-15,961 (bullish)
RUT 2153-2291 (bullish)
Tech (XLK) 166.32-174.77 (bullish)
Consumer Discretionary (XLY) 198-211 (bullish)
Housing (ITB) 76.23-84.14 (bullish)
Industrials (XLI) 99.30-106.94 (bullish)
Shanghai Comp 3 (bullish)
Nikkei 27,418-28,965 (bearish)
VIX 16.93-28.60 (bearish)
USD 95.63-96.65 (bullish)
EUR/USD 1.124-1.138 (bearish)
Oil (WTI) 63.51-74.23 (bearish)
Nat Gas 3.23-4.65 (bearish)
Gold 1 (bearish)
Copper 4.19-4.42 (neutral)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
