The Character of This #Quad4

“Sweeney calls these factors the three C’s of trust: competence, character, and caring.”
-General Robert Caslen 

Patrick J. Sweeney “was in graduate school pursuing his doctorate in social psychology when the US invaded Iraq in 2003.” General Petraeus ended up asking him to “suspend his graduate studies and assist in the military operations…”

“Sweeney quickly designed a study that allowed him to conduct research on trust among soldiers in combat.”

-The Character Edge, pg 104-105

And that’s where the 3 C’s came from. I like those, a lot. While it’s nothing like putting one’s life on the line, I do wake up each morning wanting to lead a team of market soldiers who not only have competence and character, but care for each other.

Back to the Global Macro Grind…

Welcome to another Macro Monday @Hedgeye! Are you ready to get after it? For those of you who are new to our multi-factor, multi-duration risk management #process, on Monday’s we start with measuring and mapping the prior week’s market moves.

Let’s start with the Global Currency market that went straight back to signaling Global #Quad4 last week:

1. US Dollar Index resumed its Bullish @Hedgeye TREND with a +0.5% move higher to +6.8% YTD
2. EUR/USD fell -0.2% last week to -5.7% YTD and remains Bearish TREND
3. Japanese Yen got smoked for a -2.9% loss vs. USD last week to -12.0% YTD and remains Bearish TREND
4. GBP/USD dropped another -1.1% vs. USD last week to -7.7% YTD and remains Bearish TREND
5. Turkish Lira fell another -1.3% taking its TRENDING 3-month #crash to -14.1% vs. USD
6. CAD/USD was up another +1.0% taking it back into the black at +0.4% YTD

Yep, the Canadian Dollar (CAD/USD) apparently likes it when Oil & Gas inflates like they did (again) last week and the Turkish people do not #like it when headline inflation (in devalued Liras) ramps to +74% year-over-year in May.

On the Commodities INFLATION front, it was another week of #divergences:

1. CRB Index inflated another +0.9% to +5.4% in the last month and a new Cycle High of 323
2. Oil (WTI) inflated another +3.3% to +17.8% in the last month alone!
3. Copper reflated +3.8% last week but has a TRENDNG (3-month) disinflation of -6.2%
4. Corn disinflated -6.5% last week after breaking @Hedgeye TRADE Signal Support
5. Wheat disinflated -10.2% last week after breaking @Hedgeye TRADE Signal Support
6. Lumber disinflated another -10.3% last week to -31.7% in the last month alone

In those 6 market moves you have what we’ll call The Character of This #Quad4:

1. Since the CRB Index and Oil are 2 of the heaviest weights in our INFLATION Nowcast, May is a MONTHLY #Quad3
2. Markets, broadly, are discounting that the world is going to be in Global (demand) #Quad4 in Q3

Demand destruction and INVENTORY builds are blazingly obvious to anyone who measures and maps the Global Economic Data in ROC (Rate of Change) terms at this point.

Stay tuned for the “companies” to tell you all about that heading into Q2 EPS reports.

While you wouldn’t want to be long a traditional #Quad3 Portfolio (Long Tech, Consumer Discretionary, Crypto, etc.), having the competence to keep Inflation via Energy Exposure has been dead on the right move vs. Short Elon and XLY:

1. Energy Stocks (XLE) were up another +1.1% last week taking their TRENDING (3 month) Return to +22.4%
2. MLPs (AMLP), which we’re long, were up +2.1% last week taking their TRENDING (3 month) Return to +7.8%

That was especially nice if you got more aggressive Shorting Financials (XLF) and not chasing Healthcare (XLV) last week:

1. Financials (XLF) were down another -2.0% (vs. SPY -1.2%) taking their Full Investing Cycle 3-month Return to -8.1%
2. Healthcare (XLV) was down big (-3.1%) last week taking its Full Investing Cycle 3-month Return to -1.5%

To give Healthcare some #Quad4 Credit (it’s generally an outperformer in #Quad4), it’s been a much better place to be than something like the NASDAQ which was down another -1.0% last week, taking its 3-month TRENDING Return to -11.3%.

But your saying there’s a chance… that the “bottom is in”…

Yep, heard on every US stock market up day since the May lows from mostly the people who have been crushed by #Quad4. The only #VASP Signals that I currently have showing potential bottoming processes are in China and Japan:

1. China’s Shanghai Comp was +2.0% last week taking its 1-month price momentum to +4.9%
2. Japan’s Nikkei was +3.7% last week taking its 1-month price momentum to +3.5%

Both of these major Country Exposures are unlike the USA in not only their Bullish @Hedgeye TRADE Signals but their potentially changing economic Quads. Our Q3 Nowcast for China is still #Quad2. For Japan it’s now #Quad1 in Q3.

I am long of neither China nor Japan because my discipline is not to chase. On corrections I am a potential buyer of both. The good news is that we’re not short either market. Shorting US Tech, Consumer, and Financials has been far more profitable.

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

UST 10yr Yield 2.68-3.02% (bullish)
UST 2yr Yield 2.40-2.75% (bullish)
High Yield (HYG) 75.45-80.01 (bearish)
SPX 3 (bearish)
NASDAQ 11,060-12,413 (bearish)
RUT 1 (bearish)
Tech (XLK) 129-145 (bearish)
Utilities (XLU) 71.92-75.98 (bullish)
Shanghai Comp 3076-3260 (neutral)
Nikkei 26,340-27,998 (bullish)
VIX 23.50-31.03 (bullish)
USD 101.40-103.47 (bullish)
EUR/USD 1.049-1.079 (bearish)
USD/YEN 126.01-131.37 (bullish)
GBP/USD 1.241-1.269 (bearish)
CAD/USD 0.778-0.799 (bullish)
Oil (WTI) 110.28-119.98 (bullish)
Nat Gas 8.15-9.27 (bullish)
Gold 1 (bullish)
Copper 4.15-4.55 (neutral) 

Best of luck out there this week,
KM 

Keith R. McCullough
Chief Executive Officer