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.”
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:
- Gold immediate-term TRADE overbought = $1385
- VIX (front month) immediate-term TRADE overbought = 17.99
- 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:
- Gold +15.1% YTD
- Bonds (10yr Yield) -37 basis points YTD to 2.65%
- 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:
- Dow Jones Industrial Index -3.1% YTD
- US Consumer Discretionary Stocks (XLY) -1.5% YTD
- 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:
- CRB Food Index flat (in a down US equity market) last week at +15.3% YTD
- Lean Hogs up another +6.1% last wk to +27.7% YTD
- 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?
- Silver +2.4% last week to +10.5% YTD
- Utilities (XLU) +2.3% to +7.7% YTD
- 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%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer