Overbought, Oversold

“A good laugh and a long sleep are the two best cures.”

-Irish Proverb


Indeed. Happy Saint Patty’s Day to you! For we Irish-Scottish-Canadian-American mutts, it’s a good day to wake up with a smile. My two month old daughter had a great big one on her face before I left home this morning. Life is good.


After signaling immediate-term TRADE oversold on Friday (Gold and VIX signaled overbought), US Equity Futures are smiling this morning too. And they should be – there’s nothing like reviving the animal spirits of a bubble that deflated last week.


So sell some of that Gold and buy yourself whatever you like. Amongst others, we’d go with Lorillard (LO), Owens Corning (OC), and T. Rowe Price (TROW). The two best cures for a down US stock market YTD are oversold signals and up futures!


Back to the Global Macro Grind


Immediate-term TRADE overbought and oversold signals are what they are – risk management tools that should help augment your investment process, no matter what your investment duration is…


Another way to think about this is what I call Fading Beta (or more commonly referred to as selling high and buying low). I get that “it is often that a person’s mouth broke his nose” (Irish Proverb!), so I’m not trying to be cute when I write it like that. It’s just what I try to do.


Here are some clean cut immediate-term TRADE overbought signals from Friday:

  1. Gold immediate-term TRADE overbought = $1385
  2. VIX (front month) immediate-term TRADE overbought = 17.99
  3. Bonds overbought (yields oversold) at 10yr UST yield = 2.62%

In other words, the #InflationAccelerating-slows-growth asset allocation of Long Gold, Bonds, and Fear was overbought at the following 2014 YTD gains:

  1. Gold +15.1% YTD
  2. Bonds (10yr Yield) -37 basis points YTD to 2.65%
  3. Fear (VIX) = +29.9% YTD

Sure, you could have very well broken your own nose banging it against a wall trying to get back to break-even in something like:

  1. Dow Jones Industrial Index -3.1% YTD
  2. US Consumer Discretionary Stocks (XLY) -1.5% YTD
  3. SP500 -0.4% YTD

But why the stress? Why not relax a little and buy your favorite US stocks when they are on sale? Reality is that this business isn’t that easy. We’re all stressed – and that’s the point about having a pint every now and then. Takes the ole’ edge off!


You could have bought stocks (twice) at the all-time bubble highs (intraday moves toward 1881 on the SP500) on both Friday March 6th and Tuesday March 11th. Or you could have bought them 40 S&P points lower on March 14th at 1841. There’s a difference.


#Timing matters. So do counter-consensus Global Macro Themes like #InflationAccelerating. Here’s the update on that asset allocation shift as of last week:

  1. CRB Food Index flat (in a down US equity market) last week at +15.3% YTD
  2. Lean Hogs up another +6.1% last wk to +27.7% YTD
  3. Coffee prices up another +0.8% last wk to +75.7% YTD

I know. I know. I’m focused too much on what humans eat and drink for breakfast. How about slow-growth-yield-chasing?

  1. Silver +2.4% last week to +10.5% YTD
  2. Utilities (XLU) +2.3% to +7.7% YTD
  3. REITS flat (in a down US Equity market wk) at +8.3% YTD

Yep, that’s the deal – and while you can’t eat a REIT, you can definitely pay your inflating rent, and like it. Or not. Oh yes, Mucker “where the tongue slips, it speaks the truth.”


So don’t confuse oversold signals in US Equities (or overbought signals in Gold, Bonds, Utilities, etc.) with a new narrative, because #InflationAccelerating and #GrowthSlowing in Q114 are still here to stay.


For those of us who can buy inflation protection, it’s fine. We just don’t want you to buy the all-time bubble highs on overbought signals. After all, as another Irish Proverb goes, “if you buy what you don’t need, you might have to sell what you do.”


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.61-2.75%


Nikkei 148

VIX 15.01-18.34

USD 79.21-79.86

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Overbought, Oversold - Chart of the Day


Overbought, Oversold - Virtual Portfolio

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LULU: Our Thesis vs. Consumer Opinion - Round 2

Takeaway: We will be hosting a call titled LULU: Our Thesis vs. Consumer Opinion - Round 2 on Monday, March 24th at 11:00 am ET

We will be releasing our new BLACKBOOK and hosting a call detailing our latest work on Lululemon (LULU) on Monday, March 24th at 11:00am ET.


We turned bearish on LULU in the Fall and conducted a consumer survey on key issues impacting demand in December. The results flashed major warning signals. So we pressed our short the week before the company preannounced and guided down.


We are currently re-running our survey to reassess the health of the brand from the consumers' vantage point. We will be asking many of the same questions that we did a quarter ago, which will allow us to look at the incremental change over the past few months. Rate of change matters to us more than anything with this name. The company is set to report earnings three days later on Thursday March 27th.


LULU: Our Thesis vs. Consumer Opinion - Round 2 - lulu


We'll explore in detail the following topics:

  1. Does LULU need to begin a more aggressive discounting strategy?
  2. New brands are encroaching on LULU's turf, is that rate slowing or accelerating?
  3. What is LULU's perceived price/value equation relative to other brandsand how is that changing?
  4. Growth in points of distribution for Yoga product - a key competitive threat for LULU.
  5. Insight into our store overlap analysis between Athleta and Lululemon
  6. UnderArmour scored so close to Nike in our last survey - which was a big surprise. Nike has been fighting back. Is it working?
  7. Is the 'I hate LULU Management!' factor (present in 58% of people responding last time) - still as severe? Any improvement?        


  • Toll Free Number:
  • Direct Dial Number:
  • Conference Code: 154675#
  • Materials: CLICK HERE

The call will be held on Monday, March 24th at 11:00am ET. Please contact for more information.


Takeaway: Current Investing Ideas: CCL, DRI, FXB, HCA, LO, OC, RH, TROW and ZQK

Below are Hedgeye analysts' latest updates on our NINE current high-conviction investing ideas and CEO Keith McCullough's updated levels for each.


At the conclusion of this week's edition, we feature three recent research notes we believe offer valuable insight into the market and economy.


***Please note that Brent Oil (BNO) broke our Hedgeye TAIL risk line this week. We are removing it from Investing Ideas until further notice.




Trade :: Trend :: Tail Process - These are three durations over which we analyze investment ideas and themes. Hedgeye has created a process as a way of characterizing our investment ideas and their risk profiles, to fit the investing strategies and preferences of our subscribers. 

  • "Trade" is a duration of 3 weeks or less
  • "Trend" is a duration of 3 months or more
  • "Tail" is a duration of 3 years or less

Hedgeye Cartoon of the Week




CCL – Cruise Shipping Miami (the largest cruise convention) was held in Miami this past week. While there was not much pertinent news for Carnival, we would point out that there was general optimism regarding Wave Season.


The Ukraine/Russia conflict is of some concern because of Baltic Sea exposure. While the Baltic Sea itineraries account for <10% of Carnival’s European itineraries, it will still sting if CCL is forced to cancel/reroute some of the itineraries.


Bottom line? Keep calm and Carnival will carry on. The next catalyst will be FQ1 earnings in two weeks.



DRI – As it stands, the bear case on Darden is that management will dig in their heels and continue to push forward with their value creation plan. This is a legitimate concern. However, Managing Director Howard Penney thinks it is more than reasonable to assume Starboard will be successful in gathering the appropriate votes to call a Special Meeting and prevent the Red Lobster spinoff.


In a recent research note to subscribers, Penney encouraged independent directors to speak directly with shareholders because, contrary to what management says, there appears to be a widespread lack of support for the company’s current value creation plan. He believes they have a fiduciary obligation to weigh shareholder concerns before making decisions that will materially affect the future’s company.


We continue to like DRI as a long and believe that, with the right plan in place, there is the potential for substantial value creation.



FXB – We remain bullish on the British Pound versus the US Dollar (etf FXB), a position supported over the intermediate term TREND by prudent management of interest rate policy from Mark Carney at the BOE (oriented towards hiking rather than cutting as conditions improve). Last week the Bank maintained the base interest rate at 0.50% along with its asset purchase program target (QE) at £375B.


UK high frequency data continues to offer evidence of emergent strength in the economy, and in many cases the data is outperforming that of its western European peers. This week UK Industrial Production came in strong at 2.9% in January Y/Y vs 1.9% in December and Manufacturing Production bounced to 3.3% vs 1.4% in December.


The British Pound is holding its Bullish Formation, trading above its intermediate term TREND and long term TAIL levels of support.



HCA – HCA traded down 4% this week and is now 9% from its YTD high reached last week. Compared to the S&P 500 (which was down roughly 2% over the same period) HCA has been clobbered. What we heard this week as an explanation for the weakness were comments from a number of companies who spoke at an investor conference this week, including HCA. HCA did not talk about Q1 or weather in their presentation, but many others did. While many were asked about weather related headwinds to Q114 results, we would characterize the responses as largely benign and at least consistent with comments made on Q4 earnings calls.


Taking a look at how the winter of 2014 compares to past winters, we indexed the number of snow related news stories as sourced in Bloomberg News Trends over the last several years. By that metric 2014 is significantly worse than any year since 2006.


But after the snow melts, we are expecting procedure volume to come back.



The best indicator we’ve found for surgical volume continues to forecast accelerating procedures. Our conclusion is that the weather headwind is well known, temperatures will rise, the snow will melt, and the underlying strength we saw in 2H13, at least after a snow-weakened January, is likely to continue.




LO – This week Lorillard bounced around on news that Imperial Tobacco Group unit Fortem Ventures has sued LO & NJOY and 9 other e-cig makers on infringement of its intellectual property; on rumors that BAT is considering buying the remaining stake in RAI (it currently owns 42%); and following last week’s rumor that Reynolds American (RAI) is considering acquiring LO. On this last point, we believe a RAI takeout of LO may be unlikely due to antitrust issues – combined the entity would own 67% of the U.S. menthol market.


On the e-cig suit, we’d expect it to be dismissed, as such cases have largely been in the past, on the inability to patent e-cigarette technology. Also keep in mind many companies in the industry are not seeking patents given the rapid pace of technological advancement versus the very long lead time (1-2 years) to get a patent approved. 



OC – Owens Corning was added to Investing Ideas earlier this week. Click here to read the full report from Industrials Sector Head Jay Van Sciver.



RH – Williams Sonoma (WSM) released its earnings Wednesday after the close, and while it’s not a perfect comparison to Restoration Hardware – the print does provide a sneak peek behind the curtain on the health of the industry. WSM’s 10.4% comp (the street was looking for 4.6%) was driven by a big beat from Direct-to-Consumer, with considerable strength in the furniture concepts. This is the first meaningful beat we've seen this quarter by any retailer and it was possible for two reasons:

  1. E-commerce penetration, which like RH accounts for nearly 50% of sales, offset weather induced traffic declines and
  2. Furniture sales are more immune to inconsistent traffic patterns than impulse categories.

One key difference between the two names is Holiday strategy. WSM is much more dependent on Holiday and gift giving categories which forced its brands to be price competitive in order to compete in the promotional Holiday environment. The strategy fueled the top line, but margins came under considerable pressure.


Restoration Hardware is far less dependent on these categories, which gives us confidence in our modest 4Q margin expansion assumptions.



TROW – Financials analyst Jonathan Casteleyn notes that total equity mutual funds produced another strong week of inflow with $5.3 billion of net subscriptions, a slight acceleration from the $4.9 billion inflow the week prior. These flows continue to support our bullish case on T Rowe Price.




Casteleyn considers TROW to be one of the best run asset management companies in the sector along with BlackRock.


ZQK – Below is a brief overview of where we are in the Quiksilver timeline. We see one more quarter of restructuring before the ZQK story becomes about top-line growth.

  1. 4Q12-2Q13: Hire or replace 7 out of the 8 members of the executive management team. Layout initial restructuring and cost-cutting plan.
  2. 3Q/4Q13: Begin disposal of non-core assets, rationalize distribution, and execute on initial cost cutting plan. Lay out plans to begin to finally start to grow the business.
  3. 1Q/2Q14: Continue to drive cost reductions. Begin SKU rationalization to materially cut inventory – which should be a theme in 2014. In 1Q, sales should pick up sequentially from what we saw in 4Q – which shouldn’t be tough given that sales were -15%. But keep in mind that Quiksilver and Roxy are cycling through product discontinuations and were essentially flat in 4Q, it was aggressive clearance of DC inventory that drove the top line down. We have maybe another quarter of this, and then it’s done.
  4. 3Q/4Q14: ZQK returns to a consistent growth trajectory – something that we have not seen from ZQK in well over 5 years.


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Darden: Are We Being Mushroomed?

Mushrooms can tolerate some light, but they thrive best in the dark while they grow in composted manure.  If you are being “mushroomed,” you are likely being left in the dark and fed a steady diet of offal. Managing Director Howard Penney hopes this is not an accurate metaphor for Darden’s independent Directors.



Linn Energy: The Short Case Is As Strong As Ever

If it wasn’t for companies like LINN Energy (LINE, LNCO), this job wouldn’t be any fun writes Managing Director Kevin Kaiser…  We’ve had SHORT LNCO on our Best Ideas List since 3/21/13 ($38.60/share), and it’s been quite the roller coaster.



Industrials Fishfinder: Who Is Overinvesting Now?

Looking at the recent declines in iron ore and copper prices, we are reminded of how challenging capacity additions can be in capital intensive industries. Industrials Sector Head Jay Van Sciver provides a deep dive into this and the attendant market implications.




VIDEO | McCullough: Why We're Bullish on Gold

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