“We will have to send soldiers into this party seeing red.”
World War II #history rarely accuses British Army General Bernard Montgomery of having a confidence problem. He was often decisive and ruthless. In the end, he was also a winner.
On the eve of landing on the beaches of Normandy, Monty’s bravado reminded Churchill’s Chief of Staff (Lieutenant Hastings Ismay) of the eve of Agincourt (as depicted in Henry V):
“He which hath no stomach to this fight – let him depart.” (The Guns At Last Light, pg 11)
Back to the Global Macro Grind…
Seeing red, in single-factor price momentum terms, is not what everyone saw on Friday’s US stock market bounce. That’s because not everyone looks at risk on a multi-factor, multi-duration basis. But that doesn’t mean it ceases to exist.
Actually, the Russell 2000 was down on Friday, so even in single-factor terms, many saw red. Don’t forget that even though the Russell was up for the 1st week in 7, over 60% of stocks in the Russell 2000 are currently crashing (-20% from their 12-month highs).
Back to the multi-factor thing, we highly suggest you consider Mr. Macro’s market message on a baseline 3-factor basis – PRICE, VOLUME, and VOLATILITY. In those terms, this is what we saw on Friday’s “bounce”:
- PRICE – both the SPX and Russell failed at all 3 core levels of @Hedgeye resistance (TRADE, TREND, TAIL)
- VOLUME – Total US Equity Market Volume was -11% and -4% vs. its 1 and 3 month averages, respectively
- VOLATILITY – VIX was down on the day but +3.5% and +60.3% for the week and YTD, respectively
Price momentum is an easy concept for people to understand (it goes up or down – look at the chart, bro!). That’s why many still use what I affectionately refer to as Moving Monkeys (50 and 200 day) in order to contextualize price. Unfortunately, that is not a risk management process.
The direction of price obviously matters, but so does multi-factor context. Here’s what I mean by that:
- BULLISH – Price Up, Volume Up, Volatility Down
- BEARISH – Price Down, Volume Up, Volatility Up
Within the context of a bearish intermediate-term TREND @Hedgeye, Price UP, Volume DOWN, and trending (implied) Volatility UP is bearish too.
Setting aside our research view of US #GrowthSlowing, to get bullish and “buy-the-damn-dip” in US Equity beta, what I would need to see is the SP500 close above my immediate-term TRADE line of 1949 on accelerating VOLUME and a break-down in the VIX below my TRADE line of 15.03.
Those of you paying attention to my immediate-term risk ranges will note that these levels aren’t in the area code of today’s ranges. And, to a degree, that’s the point. If I look beyond 1-3 days in duration (to 3 weeks), I’m seeing a heightening probability of more red.
Across asset classes (multi-factor), here are the other big #Quad4 deflationary forces at work across multiple-durations (TRADE and TREND):
- European Equity deflation of -0.9% last week (-2.9% YTD EuroStoxx600) is bearish TRADE and TREND
- Emerging Market Equity deflation of -1.9% last week (-3.2% YTD MSCI) is bearish TRADE and TREND
- CRB Index deflation of -1.1% last week (-2.7% YTD) is bearish TRADE and TREND
- Oil (WTI) deflation of -3.3% last week (-11.1% YTD) is bearish TRADE and TREND
- Energy Equity (XLE) deflation of -1.1% last week (-6.6% YTD) is bearish TRADE and TREND
Then, of course, you have trivial risk signals like:
- US 10yr Treasury Yield crashing (-27% YTD) to 2.19% (bearish TRADE, TREND, and TAIL)
- US Treasury Yield Spread crashing (-31% YTD) to +182bps wide (10yr minus 2yr)
- And Credit Spreads starting to move off of their all-time lows as equity and commodity volatilities breakout
“So”, yes, I do see more red pending in US, European, and Emerging Market Equities in the coming weeks and months. And, no, I don’t think last week’s immediate-term capitulation was the bottom.
But consensus does! Here’s the updated net positioning of hedge funds in non-commercial CFTC futures/options terms:
- SP500 (Index + E-mini) got longer by +5,537 contracts to a net LONG position of +54,153 last week
- 10yr Treasury Bond saw shorts get -6,976 contracts shorter last week to a net SHORT position of -58,930
- Crude Oil bulls only gave up -14,225 contracts last week, keeping the net LONG position at +285,500 contracts!
In other words, consensus got longer of the US stock market, shorter of the Long Bond, and not nearly less-long enough of a crashing Oil price.
I know that some are frustrated out there with their performance. I can assure you that I’ve been there and had to deal with that. But there comes a time where you have to choose between being consensus and not seeing any more red in your P&L.
Our Immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 2.09-2.28%
WTI Oil 79.96-84.58
Best of luck out there this week,
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Takeaway: Current Investing Ideas: EDV, GLD, RH, TLT and XLP.
Below are Hedgeye analysts’ latest updates on our five current high-conviction long investing ideas and CEO Keith McCullough’s updated levels for each.
*Please note that we removed Legg Mason (LM) and Owens Corning (OC) this week from our Investing Ideas list.
We also feature two institutional research notes which offer valuable insight into the markets and economy.
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
CARTOON OF THE WEEK
Beware the Bounce
Be wary of Friday's bounce in the stock market.
TLT | EDV | XLP
THE DATA KEEPS ON COMING OUR WAY
The week ending October 17th, 2014 was another supportive week for the slow-growth, yield-chasing trade we continue to recommend.
Domestically speaking, the data continues to come our way as we continue to anticipate a reactionary dovish policy response out of the Federal Reserve – particularly amid collapsing inflation expectations and a breakdown in commodity prices.
- Food, energy and gas led the -0.1% MoM decline in PPI-FD in September with both core and headline decelerating -20bps sequentially to +1.6% YoY.
- In the face of aggregate income growth and strong initial claims, Retail Sales unexpectedly dropped MoM for the first time since JAN, showcasing broad deceleration across 11 of 13 industries.
- U.S. housing data slowed as we watched Homebuilder Confidence, measured by NAHB’s HMI, decline to 55 in October, a drop of -5 points vs. the 9 year high reading of 59 recorded in SEPT. To be more clear, there has been a MoM decline across all three sub-indices in both current sales and current traffic, along with regional homebuilder confidence declining across all regions for the time since FEB.
Internationally speaking, in our 10/15 note titled, “Macro Medley: 0 for (Quad#4)” we highlighted how our global macro monitor is currently showcasing a near-universal negative trend of estimate revisions for both growth and inflation over the last quarter across both developed and EM markets.
With #EuropeSlowing, Japan slowing and China slowing simultaneously, we continue to expect slowing global growth to weigh on both business and investor confidence and reflexively perpetuate a negative feedback look in the domestic economy over the intermediate term.
In brief, you want to be long/overweight the asset classes and style factors that have weathered recent financial market volatility (i.e. Treasuries, munis, cash, and large-cap/high-yield/liquid equities), while remaining short/underweight its inverse (high beta, small cap illiquidity and early cycle leverage). That means remaining long of TLT, EDV, and XLP.
We added gold (GLD) to investing ideas on the long-side back in May when the outlook for U.S. economic growth was in what we call a QUAD#3 set-up in our GROWTH, INLFATION, POLICY model. The extensive swath of economic data input was collectively signaling that growth was slowing with inflation accelerating. Commodities (and any commodity-linked asset classes), treasuries, and fixed assets inflate in this set-up.
With the turn now into QUAD#4, growth is still slowing and the slope of inflation is now DECELERATING. A QUAD#4 set-up does not (and will not) bode well for commodities, but we’re safe to say gold markets are driven by additional factors given its currency-like negative correlation to the dollar and U.S. treasury bonds.
With growth slowing in Europe as well, we have to keep an eye on further devaluation from ECB President Mario Draghi, but with the current set-up in the domestic economy, we would like to front-run the next Federal Reserve Policy move, and stick with our gold position.
- GOLD vs. USD: Our GIP model is still front-running a full-year 2014 GDP print below consensus and fed estimates, and we expect downwardly revised growth estimates echoed with a more dovish tone from the Fed which will be BEARISH for the USD, and thus BULLISH for GOLD.
To exemplify the importance of front-running the Federal Reserve policy chatter, observe to the follow-through market moves after Janet Yellen’s commentary last Wednesday on the minutes release from the September 16-17th meeting:
“FURTHER GAINS IN THE DOLLAR COULD HURT EXPORTS AND DAMP INFLATION.”
a.k.a “we are not hawkish, and we’re not reverting on engrained beliefs on how monetary policy should intervene in the marketplace.”
Since her commentary, the market moves, and thus our reason for staying long of gold are self-explanatory:
- GLD: +1.18%
- UST 10-year yield: -5.0% to 2.19%
- USD Index: -0.39%
- CRB Index: -1.4% (divergence with Gold)
Earlier this week, we were reviewing a true comparable for Restoration Hardware. It's so hard to find a comp for RH. People look at West Elm, or Williams-Sonoma, but they're really different customers looking for a different aesthetic at a different price point.
But take a look at Arhaus (pronounced Our-House). It is by far and away the closest we've ever come to seeing the “Resto look” in a place that's not Resto.
Granted, the prices are higher, the quality is lower, and the design is a 7 to RH's 10. It also lacks the size and scale to compete with RH's prices. But this is one to watch.
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Click on each title below to unlock the content.
The expectation for a supply/demand floor is not a catalyst for volatility-induced real-time market moves.
Dislocation at PIMCO continued last week with BlackRock signaling weak retail and institutional equity trends in yesterday's earnings.
Takeaway: Here's a quick look at some of the top videos, cartoons, market insights and more from Hedgeye this past week.
Contributor Call: Short John Deere ($DE), Says BluePac's Chris Sommers
Hedgeye CEO Keith McCullough talks to Seeking Alpha Contributor and BluePac managing partner Chris Sommers about Sommers' high conviction short idea, John Deere. It's the latest from Hedgeye's video partnership with Seeking Alpha.
Video | McCullough: Why Volume Matters
In this excerpt from Tuesday's Morning Macro Call for institutional subscribers, Hedgeye CEO Keith McCullough explains why accelerating volume in a down move is a clear risk signal. He also has more details about volume in our Early Look and Morning Newsletter products.
Real Conversations: Hanke, McCullough Talk Macro, Money Supply and More
Video | Daryl Jones Talks Market Peak on Fox Business
Hedgeye Director of Research Daryl Jones comments on investors reassessing growth forecasts after the market peak and struggles the consumer will face with Sandra Smith on Fox Business Network. Jones' remarks begin at 2:05 in the video above.
Crank It Up
As markets are melting down, volume is going up. Take Monday’s sell-off, for example. Total exchange volume soared 44% compared to its three-month average.
In this market selloff, investors should ride with Treasuries.
POLL OF THE DAY
As West Texas Intermediate crude drops to nearly a five-year low just above $80 a barrel Thursday morning, we wanted to know...
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