“We can strive to emulate the simplicity and noiselessness of models.”
- Danny Kahneman
Some people panicked and puked at VIX 34 earlier this month (it’s at 18 now). Others lit their hair on fire on INFLATION after 18 months of it accelerating. For us, not so much. There’s always been a deep simplicity to noiselessness.
Do you have what Kahneman calls “Noiseless Rules” embedded in your decision-making #process? You obviously should. What’s the alternative? Your politics? Emotions?
“You disagree with the model’s forecast. I get it. But is there a broken leg here, or do you just dislike the prediction?” -Noise, page 136
Back to the Global Macro Grind…
Welcome to both another Macro Monday @Hedgeye and yet another all-time closing high for SPY. No matter what Quad our competition thinks we’re in, Friday’s 4712 close was the 66th ATH for the SP500 of 2021.
Let’s get right into the measuring and mapping of it all, starting with the Global Currency market:
- US Dollar Index was flat for the 2nd week in a row and remains Bullish on both my TRADE and TREND durations
- EUR/USD was flat last week as well and remains the inverse of USD, i.e. bearish TRADE and TREND
- Yen was -0.5% vs. USD last week and also remains Bearish TRADE and TREND
- GBP/USD bounced +0.3% last week but remains Bearish on both TRADE and TREND durations
- Canadian Dollar bounced +0.9% vs. USD last week but remains Bearish TRADE and TREND alongside Oil
- Turkish Lira’s crash continued, down another -1.3% vs. USD to -39.1% in the last 3 months
But “why, why, why”… why is the Dollar Strong if we’re headed into #Quad1 in Q1 of 2022 (or narrow #Quad4)?
Well, even though I don’t particularly care why (as long as USD Correlation Risk is close to zero, like it is now), at this point there are too many reasons why including: an incredibly dovish ECB with European covid case counts still rising and country lock-downs, a pending pass by the BOE on a rate hike, Bearish TRENDs in Canadian Commodities, etc.
That last point is one of the more particularly important points that both the US stock and bond markets are trying to communicate noiselessly to those who are front-running the #Disinflation Cycle:
- CRB Index bounced +2.4% last week but is still -3.7% in the last month and signaling Bearish TREND
- Oil (WTI) bounced +8.2% last week but is still down -10.5% in the last month and signaling Bearish TREND
- Natural Gas disinflated another -5.0% last week, crashing -21.1% in the last month, signaling Bearish TREND
- Palladium disinflated another -3.5% last week to down -14.4% in the last month, signaling Bearish TREND
- Corn inflated +1.0% last week to +1.9% in the last month and is one of the few Bullish TRADEs and TRENDs
In other words, if one of the strongest remaining Commodities, globally, has less than +2% of 1-month price momentum, what is the ROC (rate of change) of real world inflation really doing?
And why, ahead of tomorrow’s likely sequential deceleration in US Producer Prices (PPI), did bond yields fall, across the curve on Friday’s peak +6.8% CPI Cycle print?
A: 2021’s #Quad2 Cycle Highs for Bond Yields are likely in.
How about stocks? What US Equity Sector Styles go up during a peak-inflation to disinflation (I.e. #Quad2 in Q4 to #Quad1 or narrow #Quad4) Phase Transition?
A) Tech Stocks (XLK) were up another +5.9% last week taking their 3-month TRENDING return to +11.7%
B) Consumer Discretionary (XLY) was up +2.7% last week taking its 3-month TRENDING return to +12.1%
As most of you know by now, back-testing The Quads against TRENDING Full Investing Cycle Returns reveals that Tech (XLK) and Consumer Discretionary (XLY) are the Top 2 Sectors in both Quads 1 & 2.
Macro Unaware bears who are still trying to become famous calling for the next US stock market crash will whine about MSFT and APPL driving Tech (XLK) to all-time highs but, seriously, who cares?
These are macro Asset Allocations that The Machine predictably loves, not stock picks.
Since I did go all Captain Stock Picker on you and tell you one of my personal “picks” was Apple (AAPL) on the “bottle-necks” breakdown of the “chart”, I was quite happy with how last week played out.
On the Global Equity front, I was happy with having covered all of my China (FXI) Short when the VIX was at 34 on the Friday prior. Chinese Stocks were +1.6% last week after breaking out to Bullish @Hedgeye TREND.
And a market that went from Bullish to Bearish @Hedgeye TREND (Russia) was down -3.4% last week taking its 1-month draw-down to -13.0%. That’s a simple & noiselessness #Disinflation #VASP Signal too.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.36-1.56% (neutral)
SPX 4 (bullish)
NASDAQ 15,023-15,905 (bullish)
Tech (XLK) 167.09-176.29 (bullish)
Consumer Discretionary (XLY) 199-210 (bullish)
Housing (ITB) 76.94-85.10 (bullish)
Shanghai Comp 3 (bullish)
VIX 16.13-25.23 (bearish)
USD 95.65-96.75 (bullish)
EUR/USD 1.123-1.137 (bearish)
USD/YEN 112.50-114.21 (bullish)
GBP/USD 1.318-1.337 (bearish)
CAD/USD 0.775-0.793 (bearish)
Oil (WTI) 63.42-73.99 (bearish)
Nat Gas 3.35-4.56 (bearish)
MSFT 325-344 (bullish)
AAPL 165-182 (bullish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
