Epic Non-Quad4 Positioning

“He has won without glory who has won without peril.”
-Seneca

The aforementioned stoic quote comes from a chapter Ryan Holiday called “Don’t Be Deterred By Difficulties”, in Courage is Calling, where he goes on to remind us about Seneca’s life:

“War. Shipwreck. Torture. Exile… all that plus tuberculosis. The loss of a child. Nero’s insanity. Slandering critics” (pg 31).

And you thought getting short squeezed on Friday because you didn’t have the discipline to cover-SOME aggressively on Thursday’s 3^rd straight down day for SPY was bad!

Back to the Global Macro Grind…

Welcome to another Macro Monday @Hedgeye where the emotions and narratives of many will change, but our measuring and mapping #process of the Full Investing Cycle does not.

Week-over-week we saw Epic Non-Quad4 Positioning:

1. The most bearish lean in Global Macro remains USD vs. LONG EUROS (scoring -2.66x on a 1yr z-score)
2. 2^nd most bearish (w/w) lean is SHORT 10YR US Treasuries with a 3yr high of -495,890 net Short Contracts
3. Hedge Fund Gross Long = 180% (97^th percentile, 1yr look back), Net Long +51% (75^th percentile, 1yr back)

In other words, the crowd thinks they have the start to the year right, or they’re about to lose badly. As a reminder, for Phase III of The Bear Market you should be:

A) Long USD vs. Short Euro (grossing it up again from here after taking the long position way down)
B) Buying Duration (I bought IEF and IIGD on Friday), Gold, and Precious Metals
C) Trading The Chop, aggressively, with LOWER Gross and an ability to go Net SHORT

Let’s do that Global Currency Setup first:

1. US Dollar Index was only -0.2% last week after holding Long-term @Hedgeye TAIL Risk support of $101.12
2. EUR/USD inched +0.2% higher last week and is Bullish TRADE, Bearish TAIL (Tail Risk Level = 111 vs. USD)
3. Yen fell -1.3% vs. USD after the BOJ “did their job” convincing the market on CTRL+Print for life!
4. Canadian Dollar was only +0.1% vs. USD and remains Bearish @Hedgeye TREND alongside many Commodities
5. Brazilian Real was DOWN -1.9% vs. USD and remains Bearish TRADE and TREND post Election
6. New Zealand Kiwi was UP +1.2% vs. USD and remains Bullish TRADE and TREND

While I’m not cool with “Money Printing Is Life” (BOJ), I am ok with understanding what the widow-maker is (i.e. shorting JGBs has been an epic mistake) and that the big FX to get right in USD terms from here is really the Euro.

Consensus Econs have all agreed to agree that “Europe has staved off a recession”… because… it was 70 degrees in Spain in January and these guys have a Eurozone GDP forecast of +0.1% (yes that’s ZERO Point ONE percent)!

And I get the relative (Policy) FX trade that played out with the USA turn-tailing (like consensus needs to) as US economic data has slowed at a faster pace as of late and the Dutch guy at the ECB pea-cocking about +50bps hikes…

But on with the Full Investing Cycle signals (across durations) we go. Unlike US stocks (SPY was down -0.7% last week), Commodities did their Down Dollar Reflation thing (Gold #liked that too):

1. Gold was up another +0.3% taking its 3-month Full Investing Cycle Return to a nice +16.8%
2. CRB Commodities Index reflated +0.9% last week to only +2.5% in the last 3 months
3. Oil (WTI) reflated +1.9% last week taking its 3-month FICR (Full Investing Cycle Return) to +1.1%

Yep, Oil is “up” +1.1% in the last 3-months and, hallelujah, Europe is going to do 0.1% GDP! Just wow are these Old Wall narratives riveting at this point.

“But, but… KM, what do you mean by USA’s slowing data, aren’t you long China?”

Even though their Quads are different, I seriously got that question last week. Evidently the Industrials saw the #slowing US Industrial Production data last week (down to 1.6% and heading to zero, after being +5% at the end of Q3 in SEP):

A) Industrials (XLI) led losers at -3.4% on the week
B) Utilities (XLU), which we are long, were 2^nd worst at -2.9% last week

Long Utes (XLU) is another way to be Long #Quad4 Duration as long-term UST Bond Yields break-down alongside US Growth Expectations:

A) UST 10yr Yield was down another -6 basis points last week to down -20 basis points in the last month and…
B) UST 10yr Yield remains below @Hedgeye TREND resistance (was support) of 3.59%

Long China and Gold have been better Beta (and cycle) Adjusted Longs than praying for another LEVERAGE and SMALL CAP US Equity Basket Squeeze. Shanghai Composite Index was +2.2% last week vs. Russell 2000 -1.0%.

We like that aforementioned move in the Kiwi too because we’re long New Zealand (ENZL) Equities which also flashed a positive #divergence vs. Global Equities at +1.9% last week. We remain Long of China in KWEB and EWH terms.

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

UST 30yr Yield 3.50-3.78% (bearish)
UST 10yr Yield 3.35-3.68% (bearish)
UST 2yr Yield 4.07-4.35% (bullish)
High Yield (HYG) 74.22-76.90 (bearish)          
SPX 3 (bearish)
NASDAQ 10,312-11,251 (bearish)
RUT 1 (bearish)
Tech (XLK) 122-133 (bearish)
Utilities (XLU) 68.57-73.01 (bullish)                                             
Shanghai Comp 3142-3287 (bullish)
VIX 18.11-24.08 (bullish)
USD 101.51-105.66 (bullish)
EUR/USD 1.052-1.091 (bearish)
USD/YEN 126.45-133.06 (bearish)
CAD/USD 0.734-0.752 (bearish)
Oil (WTI) 73.21-83.27 (bearish)
Nat Gas 3.06-3.99 (bearish)
Gold 1 (bullish)
Copper 3.89-4.36 (bullish)
Silver 23.29-24.60 (bullish)
Bitcoin 15,805-22,992 (bearish)

Best of luck out there this week,
KM

Keith R. McCullough
Chief Executive Officer