Philo-Sophia

“The truth I tell you! The sea is Sophia. Wisdom.”

-Pythagoras

 

It’s all about Greece this morning. Sort of. That’s a quote from “the first man of Greece”, Pythagoras. He was also the first man “to use the term Philo-Sophia, which means philosopher, the lover of wisdom.” (Pythagoras The Mathemagician, pg 217)

 

Wikipedia calls philosophy “the study of general and fundamental problems, such as those connected with reality, existence, knowledge, values, reason, mind, and language.”  

 

That’s a lot. My philosophy this morning is this: let the market’s infinite wisdom tell me what to do next.

 

Back to the Global Macro Grind

 

There was no volume last week, but prices ripped. With the US Dollar down for the 1st week in the last 5, US stocks had their 1st up week in 5. Commodities, Junk Bonds, and even Japanese stocks (Nikkei +3.8%) were up big too.

 

Get the Dollar right, and you get a lot of things Big Beta right. With the 90-day inverse correlation between the USD and the SP500 clocking a -0.90 this morning, there’s plenty rear-view mirror Philo-Sophia in that.

 

But what would get people to sell bonds and buy stocks (on real-volume)? My philosophy is no different than Reagan or Clinton’s was – sustainable economic growth (not Greek bailout headlines and US Dollar Debauchery).

 

As a reminder, the US Dollar Index was 15-30% higher during both the Reagan and Clinton bull markets:

  1. Reagan (1) – US GDP Growth averaged 4.31% (Oil averaged $22.16/barrel)
  2. Clinton (1) – US GDP Growth averaged 3.84%% (Oil averaged $18.63/barrel)

Philo-Sophia: Strong Dollar = Strong America.

 

So, don’t expect last week’s -1.3% correction in the US Dollar to get me excited about sustainable US economic growth. The bond market isn’t excited about that this morning either.

 

Last week’s selloff in US Treasuries (UST 10yr yield rose from 1.58% to 1.69% wk-over-wk) didn’t break any lines that matter in my multi-duration model. For the 10yr yield, those lines are as follows:

  1. Immediate-term TRADE resistance = 1.69%
  2. Intermediate-term TREND resistance = 1.73%
  3. Long-term TAIL resistance = 1.91%

In other words, close but no cigar! This morning, the 10yr yield dropped right back to 1.66% and (after failing at 1.73% resistance) remains in what we call a Bearish Formation (bearish on all 3 of our core risk management durations: TRADE, TREND, and TAIL).

 

That puts Treasury Bonds in a Bullish Formation – and that’s why I took the Hedgeye Asset Allocation to Fixed Income up to 27% (versus 18% at the start of last week) on Friday’s stock market hope.

 

Hope is not a risk management process.

 

Neither is devaluing your currency in hopes that you get what this economy really needs (growth). Ask the Japanese about that – their currency has been hammered (down -5.2% in the last 2 months), but exports just hit a 3yr low (down -6.5% y/y in OCT).

 

Philo-Sophia: Keynesians, eat cake.

 

In other globally interconnected stock market signaling news:

  1. SP500 is back to bullish TRADE (1378 support), but remains bearish TREND (1419 resistance)
  2. Russell2000 remains bearish TRADE (812) and TREND (846)
  3. US Equity Volatility (VIX) held our long-term TAIL line of 14.31 support (bearish TRADE = 16.65)
  4. Chinese Stocks (Shanghai Composite) remain in a Bearish Formation (-0.5% overnight, testing YTD lows)
  5. Hang Seng holds its bullish TRADE (21,496) and TREND (20,965) support
  6. South Korea’s KOSPI remains bearish TRADE (1919 resistance) and TREND (1991 resistance)
  7. Germany’s DAX is holding intermediate-term TREND support of 7144
  8.  Italy’s MIB Index leads decliners this morning after failing at 15,733 TREND resistance

Fully loaded with Italians reporting their lowest level of Consumer Confidence report ever (84.8 NOV vs 86.2 OCT), we are still certain that A) ever is a long time and B) doing more of what isn’t working won’t work.

 

Since 2 of the top 3 Most Read articles on Bloomberg this morning have to do with where I started (Greece), I digress. “The truth I tell you!” is to stay true to the best process we know, until we have to learn from those mistakes and evolve again.

 

Our immediate-term Risk Ranges (support and resistance) for Gold, Oil (Brent), US Dollar, EUR/USD, UST 10yr Yield, and the SP500 are now $1, $109.83-111.48, $80.03-80.62, $1.28-1.30, 1.62-1.69%, and 1, respectively.

 

Best of luck out there this week,

KM

 

Keith R. McCullough
Chief Executive Officer

 

Philo-Sophia - aa.chartofday

 

Philo-Sophia - aa. portfolio


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