Long Ideas/Overweight Recommendations
- iShares National AMT-Free Muni Bond ETF (MUB)
- iShares 20+ Year Treasury Bond ETF (TLT)
- Vanguard Extended Duration Treasury ETF (EDV)
- Health Care Select Sector SPDR Fund (XLV)
- Consumer Staples Select Sector SPDR Fund (XLP)
Short Ideas/Underweight Recommendations
- SPDR S&P Regional Banking ETF (KRE)
- iShares Russell 2000 ETF (IWM)
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
- iShares MSCI France ETF (EWQ)
- iShares MSCI European Monetary Union ETF (EZU)
QUANT SIGNALS & RESEARCH CONTEXT
- Size Does Matter: All year we’ve beaten the drum on our preference for slow growth, large-cap liquidity in the domestic equity market in lieu of the high growth, small-to-mid-cap illiquidity style factor we favored last year. On this bounce, which remains the most forceful v-bottom in U.S. equities since March 2009, we are pleased to see our preferred style factor leading the charge. Specifically, within our Tactical Asset Class Rotation Model (TACRM) the top four Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings across the entire global macro universe (~200 ETFs in aggregate) are the Consumer Staples Select Sector SPDR Fund (XLP), the Utilities Select Sector SPDR Fund (XLU), the iShares MSCI USA Minimum Volatility ETF (USMV) and the Dow Jones Industrial Average ETF Trust (DIA). To recap our process, the reason we track extremes in momentum (i.e. top and bottom 20 VAMDMI readings) across the universe of investable exposures is to front-run regime changes at the primary asset class level. And as it relates to the regime of large-cap outperformance, we’re not yet getting any signals that this trade is overdone. All told, we reiterate this view and see no reason to back away in the context of our #Bubbles theme. Years of equity investors taking on liquidity risk to keep pace with high-beta equity markets is a “chicken” that we think is still in the early innings of “coming home to roost”…
- U.K. Headwinds: The latest refresh of our GIP Model on the United Kingdom shows another [bearish] #Quad4 setup here in the fourth quarter and a [bearish] #Quad3 setup in throughout 1H15. In fact, we expect U.K. growth to undershoot consensus expectations throughout this entire period. Our quantitative signals are telling a similar tale: the U.K. FTSE Index is bearish TREND and we’d short it on a continued bounce to its TREND line of resistance (6,694); the British pound is also bearish TREND and we’d short it on a bounce to its TREND line of resistance ($1.62); and the 10Y U.K. Gilt yield is bearish TREND (2.51%). In the context of the aforementioned fundamental setup, we’re not surprised to see the CurrencyShares British Pound Sterling Trust (FXB) has snuck into the bottom-20 VAMDMI readings in TACRM.
***CLICK HERE to download the full TACRM presentation.***
TRACKING OUR ACTIVE MACRO THEMES
#Quad4 (introduced 10/2/14): Our models are forecasting a continued slowing in the pace of domestic economic growth, as well as a further deceleration in inflation here in Q4. The confluence of these two events is likely to perpetuate a rise in volatility across asset classes as broad-based expectations for a robust economic recovery and tighter monetary policy are met with bearish data that is counter to the consensus narrative.
Oil: More Downside? (11/5)
#EuropeSlowing (introduced 10/2/14): Is ECB President Mario Draghi Europe's savior? Despite his ability to wield a QE fire hose, our view is that inflation via currency debasement does not produce sustainable economic growth. We believe select member states will struggle to implement appropriate structural reforms and fiscal management to induce real growth.
#Bubbles (introduced 10/2/14): The current economic cycle is cresting and the confluence of policy-induced yield-chasing and late-cycle speculation is inflating spread risk across asset classes. The clock is ticking on the value proposition of the latest policy to inflate as the prices many investors are paying for financial assets is significantly higher than the value they are receiving in return.
Best of luck out there,
Associate: Macro Team
About the Hedgeye Macro Playbook
The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today.