Overbought, Oversold

This note was originally published at 8am on March 17, 2014 for Hedgeye subscribers.

“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%

SPX 1828-1867

Nikkei 14217-14898

VIX 15.01-18.34

USD 79.21-79.86

Gold 1351-1388


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Overbought, Oversold - Chart of the Day


Overbought, Oversold - Virtual Portfolio

Tell Me A Story

“People don’t just share information, they tell stories.”

-Jonah Berger


Per Jonah Berger in his new best selling #behavioral book, Contagious, that’s one of six principles that “cause things to be talked about, shared, and imitated” – storytelling. Some of the others you might want to consider are things like “social currency”, triggers, and emotion (page 23).


What makes research content #contagious? That will be topic #1 at our company meeting day @Hedgeye HQ tomorrow. All 52 of our employees will get a copy of the book and be asked to answer that question in 140 characters or less.


Tell Me A Story - co9


So tell me a story about what’s happening in markets for 2014 year-to-date. It’s the end of the 1st quarter, so don’t forget to augment your story with last price. After all, storytelling in our profession starts with a rear-view looking score.


Back to the Global Macro Grind


What broader narrative can we wrap our idea in?” –Berger (pg 24). Given the US economic data and how markets have scored it YTD, I think the answer to that is pretty straightforward: inflation slows growth.


That, of course, is the opposite of where consensus was when 2014 started. Virtually all of the #OldWall and Washington economists and strategists were taking up both their US GDP and SP500 forecasts. On inflation, the cover of the (Keynesian) Economist (NOV 2013) was titled “The Perils of Deflation.”


Instead, 3 months into the year:

  1. #InflationAccelerating = CRB Commodities and Food Indexes +8.9% and +19.3% YTD, respectively
  2. #GrowthSlowing = 10yr UST Bond Yield -31bps YTD to 2.72%
  3. YTD US Stocks = Dow Jones -1.5%, Russell2000 -1.0%, Nasdaq -0.5%, and SP500 +0.5%

Not to be confused with the Italian Stock Market (MIB Index), which has been the recipient of a #StrongCurrency Tax Cut (CPI in March fell to +0.4% y/y), and is up another +0.7% this morning to +14.2% YTD, the US consumer side of the US stock market has been flat out ugly.


Within the SP500’s roaring +0.5% YTD gain there’s a significant amount of #SectorVariance:

  1. US Consumer Discretionary (XLY) down another -2.1% last week to -3.8% YTD
  2. Whereas slow-growth #YieldChasing Utilities (XLU) were +1.2% in a down SPX tape last wk to +8.0% YTD

While we realize that both the (un-elected) Fed and the (elected) US Government say there is no impact on America when food inflation accelerates, we’ll still keep reality on your radar:

  1. Coffee prices were up +5.5% last week to +59.9% YTD
  2. Corn prices were up +2.7% last week to +14.4% YTD
  3. Soy prices were up +2.0% last week to +12.5% YTD

Oh, that would be in US Dollar terms.


Yes, dear linear-economists, I have a non-fiction story for you  - inflation is priced locally (i.e. in local currency). So, if you get the rate of change (slope of the line) in a country’s currency right, you’ll get inflation right. If you get the slope of inflation right, you’ll get the rate of change in real growth right.


With the US Dollar Index still below our long-term TAIL risk line of $81.17, maybe that’s why we are starting to see a resurgence in the mother of all Burning Buck trades – Emerging Markets. Yep, as in the ones in Asia and Latin America that hit all-time highs when the US Dollar Index hit all-time lows (2011).


With Facebook (FB) face planting last week, look at what Emerging Markets did:

  1. MSCI Emerging Markets Index = +3.2% on the week to -2.7% YTD
  2. MSCI Latin America Index = +5.2% to -1.9% YTD

Yep, the squirrels in Brazilian Equities are running wild again as Latin America goes nuts for an alternative to being long a US social-media-bubble stock that lost 30-40% of its value in a month!


So would you rather be long socialism or social media? Tell me a story.


With a 3-5 year old story about “Flash Boys” (machines front-running monkeys) being popularized by Michael Lewis and 60 Minutes last night, I’m looking for something no one has borrowed from someone else. I’m looking for a broader narrative that can make us money by being early, instead of popular.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 2.64-2.81%


VIX 13.89-15.49

USD 79.55-80.41

EUR/USD 1.36-1.38

Gold 1


Best of luck out there today,



Keith R. McCullough
Chief Executive Officer


Tell Me A Story - Chart of the Day


Tell Me A Story - Virtual Portfolio

Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

March 31, 2014

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TODAY’S S&P 500 SET-UP – March 31, 2014

As we look at today's setup for the S&P 500, the range is 32 points or 0.63% downside to 1846 and 1.10% upside to 1878.                                               










THE HEDGEYE DAILY OUTLOOK - 10                                                                                                                                                                  



  • YIELD CURVE: 2.29 from 2.27
  • VIX closed at 14.41 1 day percent change of -1.44%

MACRO DATA POINTS (Bloomberg Estimates):

  • 9am: ISM Milwaukee, March (prior 48.59)
  • 9:45am: Chicago Purchasing Mgr, March., est. 59.0 (prior 59.8)
  • 9:55am: Fed’s Yellen speaks in Chicago
  • 10:am: Annual Wholesale Inventory and Sales Revisions
  • 10:30am: Dallas Fed Manufacturing, March, est. 3.0 (prior 0.3)
  • Noon: USDA quarterly grain stocks report
  • 8pm: St Louis Fed VP David Andolfatto on virtual currencies


    • Obamacare reaches March 31 deadline
    • Senate to vote on House-passed doc-fix legislation w/60-vote threshold to send to Obama for signature
    • Senate vote on whether to take up HR2979, incl. extension of jobless benefits
    • Senate Finance Cmte will likely vote during this week to revive dozens of tax breaks that expired Dec. 31
    • IMF releases parts of Global Financial Stability Report
    • 10am: Supreme Court releases case list, hears arguments in software patenting case
    • 10:30am: FCC holds monthly open commission mtg; to consider Chairman Tom Wheeler’s multiple tv station mkt control proposal, Wi-fi use


  • Kerry demands Russian retreat, Lavrov seeks federal Ukraine
  • Putin calls Obama to discuss resolution to Ukraine
  • World ill-prepared for global warming impact, UN panel says
  • Obamacare deadline for some private insurance sign ups
  • Banks including Citi, JPMorgan in Swiss regulator focus on FX
  • GM air bag defect investigation considered by U.S. in 2007
  • MH370 searchers operating on guesstimates, Abbott says
  • Paramount’s “Noah” rises to top box office in weekend debut
  • High-frequency traders ripping off investors: Michael Lewis
  • Supreme Court releases case list, hears software patenting case arguments
  • Apple-Samsung patents trial begins in San Jose
  • Port Authority’s Samson resigns after report blasts agency
  • Medtronic ends symplicity HTN-4 trial, mulls IDE path forward
  • Medtronic novel aortic valve reduces deaths vs surgery
  • Tesla says China general manager Kingston Chang left co.
  • Blucora said to plan all-cash offer for Brookstone: WSJ
  • Japan Feb. industrial production falls 2.3% m/m; est. up 0.3%
  • Euro-area inflation lowest in more than 4 years, misses ests.
  • Samsung SDI agrees to buy Cheil Industries for $3.3b
  • Erdogan’s party wins Turkish municipal vote; lira rises
  • Alibaba to spend $692m to partner with Intime Retail
  • Daylight saving change takes place in U.K., most of Europe


    • Cal-Maine Foods (CALM) 6:30am, $1.59
    • Gas Natural (EGAS) 4:14pm, $0.30
    • InterOil (IOC) 6am, $0.04
    • Tribune (TRBAA) pre-mkt, $0.99
    • UTi Worldwide (UTIW) 8am, ($0.12)


  • Nickel Set for Biggest Quarterly Gain Since 2010 on Supply View
  • Shanghai Gold Cheapest to London Since 2012 on Weak Demand
  • Grain Bulls Proved Right With Best Rally Since 2010: Commodities
  • WTI Trades Near 3-Week High on U.S.-Russia Talks; Brent Steady
  • Nickel-Ore Supply in China Seen Lasting Five More Months on Ban
  • Gold Trades Near 6-Week Low for Monthly Drop on Stimulus Outlook
  • Wheat Pares Biggest Monthly Gain Since 2012 on Rains; Corn Falls
  • Sugar Falls After Wk-Long Rally on Weather Doubts; Arabica Drops
  • World Ill-Prepared for Global Warming Impacts, UN Panel Says
  • Rebar Pares Biggest Quarterly Drop in 9 Months as Output Falls
  • Record Natural-Gas Need Keeps Bulls Betting on Advances: Energy
  • Former Xstrata CEO Davis Raises About $3.75 Billion to Buy Mines
  • U.S. Thermal Coal Faces Tough Road on Retirements, Clean Energy
  • Gold Sales by Japanese Retailer Jump Fivefold Before Tax Change

























The Hedgeye Macro Team















Best Ideas Update: Party Time In Brazil?

Takeaway: Our bullish bias on the BRL is working and, as anticipated, so are Brazilian equities & EM assets broadly. We see further upside from here.

Editor's note: This was originally published March 28, 2014 at 15:09 in Macro. For more information on Hedgeye click here.


On Wednesday, we published our updated thoughts on EM capital and currency markets strategy. That piece was long and thorough, so in the interest of not taking up too much of your time on a Friday afternoon, we’ll keep this note brief...


The key takeaway is simple:


We are broadly bullish on EM assets with respect to the intermediate-term TREND duration. On a forward-looking basis, we no longer see the same globally interconnected headwinds that caused us to get so pervasively negative on emerging markets roughly 1Y ago when we introduced the first of many subsequent presentations supporting our #EmergingOutflows theme.


Best Ideas Update: Party Time In Brazil? - rio1


Indeed, it would seem that the relief rally we started to call for on our FEB 27 conference call on Brazil has materialized and we anticipate further upside. Moreover, the nature of the rally (i.e. being led by the countries generally perceived as the most risky) is very much in line with our expectations.

  • EM assets are up +1.9% on average at the asset class level since then… that compares to a -0.3% decline for the US equity market over that same duration.
  • EM country-level ETFs are up +1.6% on average… India (EPI) at +11.9%, Turkey (TUR) at +10.6%, Indonesia (EIDO) at +7.6% and Brazil (EWZ) at +7.2% account for the four positive divergences (i.e. > +1 sigma vs. the mean) in the sample.


Looking into Brazil specifically, yesterday we received the first of what is likely to be several supportive catalysts with respect to our bullish bias. Specifically, a CNI-Ibope poll showed President Rousseff’s approval rating  ticked down to a record-low of 51%; that marks the first sequential decline since JUL ’13, when millions of Brazilians took to the streets across the country in protest over inflation and the mismanagement of public funds.


The results of the poll are supportive of our belief that: A) the threat to Dilma Rousseff’s presidency is real come OCT 5th; and B) at the bare minimum, popular discontent will amplify the perceived failures of her economic policies during the campaign season, which opens the door for her Worker’s Party (PT) to cede share in the Brazilian legislature. One-third of Senate seats are up for grabs in the upcoming general election and as are all 513 seats in the Chamber of Deputies. To the extent opposition parties form a stronger mandate we could see a gridlock-induced cap on Rousseff and Finance Minister Guido Mantega’s expansionary fiscal policies – assuming they even return to power in 2015.


In conjunction with the news release yesterday, the BRL jumped nearly a full +2% vs. the USD; Brazil’s benchmark Bovespa Index ripped +3.5% and was led by state-run companies like Electrobras (+9.8%) and Petrobras (+8.1%). We continue to think contrarian equity investors will find PBR as attractive on the long side as we do amid the prospect for fuel pricing reform and a likely acceleration in production growth. Refer to our FEB 27 slide deck for more details.


Lastly, we just wanted to thank Standard & Poor’s for Monday’s downgrade of Brazilian sovereign debt for helping cement what we clearly think is: A) a bottoming process in the prices of Brazilian financial assets; and B) a topping process in pervasively bearish sentiment towards Brazil among international capital allocators.



If you are looking for some long ideas in the EM space, then you’ve come to the right place. We have a number of high-conviction ideas that: A) have been working; and B) we expect will continue working as additional catalysts materialize.

  • Long India: The EPI ETF is up +12.4% since we outlined our thesis on OCT 29; that’s good for the third best performance across the basket of EM country-level ETFs we track.
  • Long “New China” (CQQQ + CHIQ)/Short “Old China” (CHIX + CHXX): On an equal-weighted basis, this strategy is up +18.4% since we outlined our thesis on DEC 4.
  • Long Indonesia: The EIDO ETF is up +19% since we outlined our thesis on JAN 30; that is the best-performing EM country-level ETF over that duration.

Best Ideas Update: Party Time In Brazil? - dale


Best Ideas Update: Party Time In Brazil? - 2


We need to do more work on the long side of Turkey (TUR), lol… the mean reversion opportunity afforded by a -33.9% YoY decline is substantial indeed!


In all seriousness, please shoot us an email if you want to see our work on any of these plays and we’ll be happy to get the relevant materials over to you and/or to set up a call.


Have a great weekend,




Darius Dale

Associate: Macro Team


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