“It’s a lack of clarity that creates chaos and frustration. Those emotions are poison to any living goal.”
-Steve Maraboli
The market is a funny thing, isn’t it? Last week, you would have thought the world was ending. After two straight up days, the world has been saved.
Zero consistency. Zero process.
When you jump from strategy to strategy or headline to headline, there isn’t enough time to see a full cycle (Draw Up, Top, Draw Down, Bottom, repeat). All you ever see is randomness, which will have zero clarity and become extremely frustrating.
So today, let’s slow down and stick to a repeatable process that has gone through the full cycle.
Name one firm that went long of inflation in 2020, out of inflation, then short of inflation in 2022, to now long inflation again in 2024. #hedgeye. For some context, inflation (CRB Index) was up +31% in 2021, dropped -12% from 2022 till 2023, and is now up +7.2% in 2024.
That is full-cycle investing; cycles don’t happen in 2 weeks; they happen over many years.
This is verse QQQ being up +3.8% in 2024. So, we may not be long what everyone else is, but how are you supposed to outperform an index when you own the index itself?
Back to the Global Macro Grind ...
In Real-Time Alerts, there are eight shorts and six longs. 5 of 6 of those longs are inflation and/or commodities.
In Portfolio Solutions, 16 of the 29 long positions are inflation, commodities, or energy longs.
That is where we are today; what is coming up? Meta Earnings tonight, MSFT and GOOGL Earnings Tomorrow, Exxon Earnings Friday, PCE Price Index Friday, Monthly OPEX for Bitcoin Friday. Next week on 5/1 we have the Fed Meeting.
Now, let’s look at the chart below to see how volatile the market believes these events will be (this chart is from Tier 1 alpha and changes every day). Going into Friday, the market is expecting increased volatility. From there, going into the FOMC meeting, the market is expecting even more volatility. This chart changes constantly so I would expect that 16.45 for the FOMC Meeting to increase as risk managers realize that the Fed meeting is next week. The last important point on volatility is that we remain in negative gamma, which means there will be large directional swings in the S&P 500 to either the upside and/or downside.
During last week’s down move, one of the big headlines was that inflation had gone up too quickly, making people question whether the Fed would cut rates. On Monday, 4/15, market expectations for a rate cut (which are always wrong) were pricing in a 58% chance of a cut in July and an 80% chance of two cuts by December.
After the market panic, here are the expectations as of today: a 47% chance of a cut in July and a 67% chance of two cuts by December.
The market didn’t change its expectations. They are still expecting cuts.
The other major headline was all about the geopolitical risk surrounding Israel. I use Israel Sovereign CDS to cut through the headlines because someone always knows something, and they will always trade on their information. So, we can use this chart to get a pretty good gauge of where the risk stands. As you can see, the risk remains. As well, the US Senate passed a bill to send more money to Ukraine ($61 Billion), Taiwan ($8 Billion), and Israel ($26 Billion). How this works is, when we send more money, the tensions escalate and/or perpetuate. We will continue to watch Sovereign CDS to risk manage around these perpetual wars.
To summarize, as we go through this week, listen to The Call @ Hedgeye to see if any analyst believes that there will be earnings surprises. Understand that the large volatile events that the market is expecting are Friday and next Wednesday. Find the low ends of the risk ranges to execute, which is currently in inflation.
Yesterday was a Manufacturing PMI day for me for large global economic data points. We saw accelerations in Australia, Japan, and India (we remain long of India INDA). All of these countries saw new orders accelerate, improvements in employment, and accelerating input costs.
This is in comparison to Eurozone PMI, which had the lowest new orders since January. Lower backlogs of work (no new orders for a long time means you run through your backlogs) and decelerating input cost (lower demand, lower inflation).
Today, we got a German Business Expectations index, which accelerated to the highest level since May 2023. To summarize Europe, the market expects an 86% chance of a rate cut on 6/6. This is driving up business expectations while current market conditions remain low. We also have Europe in a positive Quad environment this year.
Lastly, my last Early Look was introducing a new product called HedgAI Signals. Since that Early Look the signals have opened five new positions across major indexes, stocks, commodities, currencies, and yields. They also closed the Meta position on 4/17, saving HedgAI Signal subscribers from a 4% drawdown on 4/19. The signals also remained with a Buy on TSLA into the earnings; the aftermarket has TSLA up +10% overnight. Subscribe here as the signals just opened two new Longs this morning.
I hope this helped simplify the noise for you. I can guarantee that this process I just showed is repeatable. Time for me to get my Zen in with some yoga.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 30yr Yield 4.61-4.82% (bullish)
UST 10yr Yield 4.48-4.72% (bullish)
UST 2yr Yield 4.86-5.05% (bullish)
SPX 4 (bearish)
NASDAQ 15,104-15,992 (bearish)
RUT 1 (bearish)
Tech (XLK) 189-202 (bearish)
Insurance (IAK) 108.87-114.97 (bullish)
Shanghai Comp 2 (neutral)
Nikkei 36,564-38,923 (bearish)
BSE Sensex (India) 72,126-75,098 (bullish)
DAX 17,629-18,242 (bullish)
VIX 14.79-20.28 (bullish)
USD 105.26-106.33 (bullish)
Oil (WTI) 80.84-86.95 (bullish)
Gold 2 (bullish)
Copper 4.25-4.57 (bullish)
Silver (SLV) 26.90-29.32 (bullish)
AAPL 160-172 (bearish)
GOOGL 152-163 (bullish)
Best of luck out there today,
Ryan Ricci
