A Counter TREND Week, It Was

“A Crisis arises in response to sudden threats that previously would have been ignored or deferred…”
-Neil Howe

Sound familiar? Is Neil Howe alluding to US Deficit Spending? The US National Debt? The Middle East? That’s the point of The Fourth Turning Is Here – he’s talking about all of it.

Back to the Global Macro Grind…

Welcome to another Macro Monday @Hedgeye. Friday was not a day to do nothing…

Friday’s price action was what we call a Counter @Hedgeye TREND day where the big things in Global Macro Markets go the opposite way of the current intermediate-term TREND Signals.

The most obvious Counter TREND move was in the US Dollar Index (it was down for the 1^st week in 7):

1. US Dollar Index corrected -0.2% last week, taking its TRENDING 3-month return to +2.8%
2. EUR/USD couldn’t even bounce on that, down another -0.5% last week, and remains Bearish TREND
3. Yen didn’t bounce either, down -0.1% vs. USD last week taking its 3-month TRENDING return to -3.4%
4. Canadian Dollar (CAD/USD) broke bad back to Bearish TREND with a -1.4% weekly decline
5. Mexican Peso was down hard, -5.2% vs. USD taking its TRENDING 3-month return to -6.0%

When I say a Counter TREND move (i.e. a -0.2% correction) is “obvious”, what happened in FX last week was VERY obvious. That’s when the Major Currency Pairs against the USD couldn’t even muster an UP week!

There was also an obvious Counter TREND move in both Oil and Energy Stocks:

A) Oil (WTI) corrected -8.8% last week taking its TRENDING 3-month return to +16.1%
B) Energy Stocks (XLE) corrected -5.2% last week, taking their TRENDING 3-month return to +8.4%

That’s right, even if the US Dollar, Oil, and Energy Stocks weren’t going to be up to start this week (they are), those 3 Major Asset Allocations have been up +2.8%, +16.1%, and +8.4%, respectively in the last 3 months versus:

1. Utilities (XLU) down another -2.9% last week to -13.1% in the last 3 months
2. Consumer Staples (XLP) down another -3.1% last week to -10.4% in the last 3 months
3. Russell 2000 (IWM) down another -2.2% last week to -5.2% in the last 3 months

Since we’re Long USD, Oil, and Energy Stocks vs. Short XLU, XLP, and IWM, that’s all good from a patience & process driven Full Investing Cycle positioning perspective.

Inclusive of Friday’s Counter TREND day, the Russell 2000 (IWM) is in the midst of a -13% drawdown since AUG 1^st!

The widely owned #MOAB Tech (XLK) ETF led the Counter TREND “rally” last week. The XLK, which has 3 #MOAB stocks representing 50% of the Sector Style Exposure (MSFT, AAPL, NVDA), was +2.6% last week to -2.2% in the last 3 months.

If you think that looks like the Titanic being back on tilt, the math agrees:

A) 90% of SPY’s “year-to-date” return is in 7 stocks
B) Only 33% of stocks in the SP500 are beating SPY “year-to-date”

We don’t do “year-to-date” because our hard-earned capital doesn’t. We do what Cycles do. We do Cycle-to-date #CTD. And for The Cycle-to-date, the Russell 2000, NASDAQ, and SP500 are down -28.5%, -16.4%, and -10.2%, respectively.

The Bond Market continues to see US INFLATION #accelerating and we’ll get that in Thursday’s CPI print:

A) UST 2yr Yield was up another +4 basis points last week to 5.08%
B) UST 10yr Yield was up another +22 basis points last week to 4.79%
C) High Yield OAS Spread WIDENED another +28 basis points last week to +422bps over Treasuries

In addition to Oil reflating this morning, last week we saw US Natural Gas inflating +14.0% to +28.4% in the last 3-months. If you think that’s cherry picking, look at Orange Juice inflating another +7.9% last week, taking its TRENDING 3-month return to +43.0%.

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

UST 30yr Yield 4.60-5.02% (bullish)
UST 10yr Yield 4.49-4.87% (bullish)
UST 2yr Yield 5.00-5.17% (bullish)
High Yield (HYG) 71.98-73.44 (bearish)           
SPX 4 (bearish)
NASDAQ 12,965-13,452 (bearish)
RUT 1 (bearish)
Tech (XLK) 160-169 (bearish)
Energy (XLE) 84.40-93.62 (bullish)
Utilities (XLU) 54.08-59.71 (bearish)                                               
Shanghai Comp 3070-3138 (bearish)
Nikkei 30,365-32,735 (neutral)
BSE Sensex (India) 65,125-66,419 (bullish)
DAX 14,997-15,438 (bearish)
VIX 16.49-20.16 (bullish)
USD 105.43-107.09 (bullish)
EUR/USD 1.042-1.64 (bearish)
USD/YEN 148.21-150.11 (bullish)
GBP/USD 1.205-1.227 (bearish)
CAD/USD 0.723-0.738 (bearish)
Oil (WTI) 82.04-95.99 (bullish)
Nat Gas 2.87-3.49 (bullish)
Gold 1 (bullish)
Silver 20.36-22.78 (bearish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer