“You seem confident in your conclusion, but this is not an easy problem: there are cues pointing in different directions.”
- Danny Kahneman
With the latest US stock and bond market freak-out coming on the heels of Fed Head commentary about the Fed’s balance sheet and a rear-view release of the “Fed Minutes” pending today, I have a question:
What do you think both the US Equity and High Yield markets are going to do after the 5th, 7th, and 9th rate hikes this year?
In this context, Kahneman’s quote from a chapter on “Pattern Noise” (Noise, pg 209) is a good one. With quite literally EVERY one of my TRENDING cross Asset Signals (and economic data) signaling #Quad4 (ex-Treasuries), why is the Fed so confident in this rate hike path conclusion?
Back to the Global Macro Grind…
Unlike many, I’ve had the humility to listen to my #VASP market signal and reduce my long-term Treasuries (TLT) Asset Allocations on bounces (in bonds prices) to A) lower-highs when B) bond yields approach the LOW-end of my Risk Ranges.
In any other #Quad4, you’d get paid to buy-the-damn-dips and hold TLT. Not this time. That said, you have been paid, nicely, doing so in everything from US Dollars (our #1 Asset Allocation this time) to Utilities (XLU), Gold, Gold Miners (GDX), etc.
Why? Every time my Treasury Bond Volatility Signals start to calm, the market prices in ANOTHER +0.5-1.0 rate hikes! Post Brainard’s comments yesterday:
- The number of expected Fed Rate Hikes by DEC 2022 shot up to 8.92x!
- The UST 2yr Yield shot +9 basis points higher (in a day, that’s a lot) to 2.55%
- High Yield (HYG) and Junk Bond (JNK) markets got smoked intraday
- Russell 2000’s #Quad4 Drawdown moved back to -16.2% from its Cycle Peak
- NASDAQ’s #Quad4 Drawdown moved back to -11.5% from its Cycle Peak
- Our Top 2 Sector Shorts (Tech and Consumer Discretionary) led losers with > -2% drops
- Our Top Sector Long (in Signal Strength terms), Utilities (XLU) was +0.6% on the day
- US Dollar Index made new YTD highs
And they’ve only raised rates ONCE.
I know, I know… the “charts” looked “good”… until the Dow Bro, failed at its 200-day Moving Monkey… and the Yield Curve (which is another explicit market cue that is pointing at #Quad4 in Q2) “doesn’t matter this time.”
But, it all has and continues to matter to those of you who aren’t short-term chartists. Longer-term Full Investing Cycle investors aren’t chasing 5 and 10-day Moving Monkeys, telling themselves it’s “different this time” stories of the day.
What would be different this time is if the UST 10yr Yield can hold above this 2.50-2.60% level. Why?
A) As you can see in today’s Chart of The Day, the upper threshold of the 10yr has always been the prior Cycle High in the Fed Funds Rate
B) 1-3 trading days of Macro Tourist panic attacks don’t change that longstanding relationship
C) Never (as in it has never happened before) is still a long time
So that’s one reason why I am interested in buying back SOME (note the all CAPS) of the TLT that I sold higher last week. Since anything can be different this time, if I decide to put that trade on today, I’ll keep it on a short leash.
Like I said, what’s been most interesting this year is that the other “Rate Sensitivity” Longs like Utes (XLU) and Gold (GLD) have been easy to buy and hold, despite all of this happening to people who only trade rates.
Another recent Bullish @Hedgeye TREND breakout has been in rate sensitive REITS (XLRE), which broke bad to Bearish TREND when Rate Hike Expectations ramped from 4x to 8x, but are now breaking out on the concept of hiking 9x.
At least the Fed’s concept of 9 rate hikes is “interesting.” Kind of like inflation being “transitory” at this time last year, lol.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 2.41-2.64% (bullish)
UST 10yr Yield 2.23-2.63% (bullish)
UST 2yr Yield 2.12-2.57% (bullish)
High Yield (HYG) 80.33-82.87 (bearish)
SPX 4 (bearish)
NASDAQ 13,601-14,640 (bearish)
RUT 1 (bearish)
Tech (XLK) 150-163 (bearish)
Gold Miners (GDX) 37.18-39.86 (bullish)
Utilities (XLU) 71.55-76.53 (bullish)
Shanghai Comp 3126-3299 (bearish)
DAX 14,108-14,770 (bearish)
VIX 18.14-26.05 (bullish)
USD 98.07-99.86 (bullish)
EUR/USD 1.087-1.107 (bearish)
USD/YEN 121.12-124.15 (bullish)
Oil (WTI) 95.63-114.17 (bullish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
