Rate Hikes & Crashes

“Ability and good character, sad to say, do not always appear together.”
- Leon Levy

I thought that was a good quote in a timeless read that a subscriber sent me titled The Mind of Wall Street. In a good chapter that Levy titled “Beauty And The Beast”, he went on to write that:

“As investors, we deceive ourselves a thousand different ways, both small and large. We attribute gains to acumen when they are the product of luck, and attribute losses to ill fortune when they are often the product of stupidity or inattention.” (pg 106)

Now that the NASDAQ has moved into #crash mode for the 2^nd time this year, I think everyone is paying attention.

Back to the Global Macro Grind…

Welcome to another Macro Monday @Hedgeye where it looks like we’re going to get another bear market bounce. What is a crash and/or bear market? I’ve always used the -20% definition. That’s where the NASDAQ was on Friday vs. its #Quad2 Cycle peak.

While it’s #Quad2 in Q2 for Indonesia, it’s not for the USA. The Global Currency market continues to signal #Quad4 in Q2:

1. US Dollar Index was up another +0.5% last week and remains in #Quad4 breakout mode
2. EUR/USD was -0.2% last week to -3.9% in the last month alone and remains Bearish TRADE and TREND
3. Yen got smoked for another -2.1% loss vs. USD last week and also remains Bearish TRADE and TREND
4. GBP/USD was down another -1.5% last week and remains Bearish TRADE and TREND as well
5. Russia’s Ruble was -8.1% vs. USD last week taking its #crash to -41.9% in the last month alone
6. Turkey’s Lira was down another -3.9% vs. USD last week to -8.5% in the last month = Bearish TRADE and TREND

Since the US Dollar remains a Top 3 Asset Allocation for me alongside Gold, I was happy with that setup last week. Gold was up another +0.9% to +7.8% in the last month (vs. NASDAQ down -6.9% and -17.8% in the last 1 and 3 months, respectively).

Since I try to keep the discipline of only taking up my Asset Allocation to Treasury Bonds when yields are approaching the top-end of my Risk Range™ Signals, I got that buying opportunity late last week:

A) UST 2yr Yield was +27 basis points on the week, pricing close to 7 rate hikes (in 2022) at 1.75%
B) UST 10yr Yield was +33 basis points on the week to 1.99%
C) High Yield OAS Spread was +18 basis points wider last week to +394 basis points over treasuries

When High Yield Spreads breakout like this, it’s also a #Quad4 Signal for a pending ROC (rate of change) #slowing of Corporate Profits. We remain short of both High Yield (HYG) and Junk (JNK) which sold off to new Cycle Lows as well last week.

From here, I like Long TLT vs. Short HYG. It’s not that dissimilar from Long Gold vs. Short NASDAQ. While I don’t think they’ll get away with more than 2-3 rate hikes, if the Fed does 6-7, I think I’ll get paid more on these long/short setups during #Quad4.

In terms of US Equity Sector Styles last week:

A) Consumer Discretionary (XLY) was down another -2.8% to -7.6% and -18.7% in the last 1 and 3 months, respectively
B) Tech (XLK) was down another -3.8% to -7.0% and -17.6% in the last 1 and 3 months, respectively
C) Energy (XLE) was up another +2.2% last week to +9.1% and +34.3% in the last 1 and 3 months, respectively

I didn’t buy Energy (XLE) back until the last month. But I still like that long/short #VASP Signal of Long XLE vs. Short XLY too.

Commodities actually started correcting late in the week (as bond yields were rising which is interesting) and Oil/Energy is down again here this morning so we’ll get a buying opportunity there. Here were some important weekly moves:

1. CRB Commodities Index corrected -1.6% on the week to +12.2% in the last month and remains Bullish TREND
2. Oil (WTI) corrected -5.5% last week to +19.6% in the last month and remains Bullish TRADE and TREND too
3. Copper corrected -6.3% last week and is breaking down through my TRADE Signal of support this morning
4. Corn inflated another +1.1% last week to +17.2% in the last month and remains Bullish TRADE and TREND
5. Coffee disinflated -1.0% last week to -11.9% in the last month and is back to Bearish TRADE and TREND

You won’t read about it on MSM, but there is a broadening of breakdowns (to Bearish TRADE and TREND Signals) in the Softs: Oats, Palm Oil, and Cotton all broke bad last week alongside Coffee. I’ll keep you posted on the numbers instead of narratives.

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

UST 10yr Yield 1.68-2.08% (bullish)
UST 2yr Yield 1.32-1.78% (bullish)
High Yield (HYG) 80.44-82.80 (bearish)           
SPX 4125-4329 (bearish)
NASDAQ 12,503-13,568 (bearish)
RUT 1 (bearish)
Tech (XLK) 140-152 (bearish)
Energy (XLE) 70.72-79.31 (bullish)
Gold Miners (GDX) 34.99-40.08 (bullish)
Shanghai Comp 3 (bearish)
VIX 28.34-36.94 (bullish)
USD 97.14-99.86 (bullish)
EUR/USD 1.079-1.116 (bearish)
USD/YEN 115.33-117.98 (bullish)
GBP/USD 1.294-1.335 (bearish)
Oil (WTI) 100.29-124.22 (bullish)
Gold 1 (bullish)
Bitcoin 36,619-44,208 (bearish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer