THE HEDGEYE MACRO PLAYBOOK

Takeaway: In today's Macro Playbook, we show how the current quantitative setup within the equity market supports reiterating our #Quad4 theme.

INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

  1. iShares National AMT-Free Muni Bond ETF (MUB)
  2. iShares 20+ Year Treasury Bond ETF (TLT)
  3. Vanguard Extended Duration Treasury ETF (EDV)
  4. Health Care Select Sector SPDR Fund (XLV)
  5. Consumer Staples Select Sector SPDR Fund (XLP)

Short Ideas/Underweight Recommendations

  1. iShares MSCI European Monetary Union ETF (EZU)
  2. iShares MSCI France ETF (EWQ)
  3. iShares Russell 2000 ETF (IWM)
  4. SPDR S&P Regional Banking ETF (KRE)
  5. SPDR S&P Oil & Gas Exploration & Production ETF (XOP)

 

QUANT SIGNALS & RESEARCH CONTEXT

If you tangentially followed our research in the YTD, you’d probably arrive at the conclusion that we’re ultra bearish and/or always negative on the stock market – insomuch as you would’ve arrived at the polar opposite conclusion(s) when we were the bulls of bulls in 2009 or in 2013.

 

Fortunately for those who are actually paying attention, our research views are much more nuanced. Specifically, being bearish on growth and/or inflation affords us the opportunity to BUY and SELL a number of sectors and style factors.  

 

Along those lines, we reiterate our BULLISH bias on the sectors and style factors associated with #Quad4 outperformance (healthcare, consumer staples, REITs, mega caps) and our BEARISH bias on those that are associated with #Quad4 underperformance (energy, materials, regional banks, small-to-mid caps).

 

Both recent performance and current levels of momentum support reiterating that view. On a WoW basis, the XLV, XLP, VNQ and USMV ETFs are up +1.6%, +1.1%, +1.5% and +0.8%, respectively. This contrasts with the XLE, XLB, KRE and IWM being down -9.4%, -4.0%, -2.4% and -1.5%, respectively. The domestic E&P ETF (XOP) – another one of our core short ideas – continues to crash, having dropped -19.2% in just the last week alone!

 

Looking to our Tactical Asset Class Rotation Model (TACRM) we are pleased to see this theme continuing to play out from a volume-weighted perspective across multiple durations. Specifically, among the 47 domestic equity sectors and style factors we track, healthcare (XLV, IHI, IHE), consumer staples (XLP), REITs (VNQ) and mega caps (USMV) account for 6 of the top 8 Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings. Meanwhile, mall-to-mid caps (IWM, IWO, IWN), materials (XLB, GDX) regional banks (KRE) and energy (XLE, XOP, IEZ, AMLP) account for 10 of the bottom 11 VAMDMI readings.

 

THE HEDGEYE MACRO PLAYBOOK - TACRM U.S. Equity Style Factors

 

To top it all off, trends across key economic indicators continue to augur for a continuation of our #Quad4 theme in the domestic equity market (click HERE and HERE to review said data). As both Black Friday and Cyber Monday sales and traffic data suggest, Consensus Macro remains dead wrong on its [lazy] “lower gas prices = consumer renaissance” thesis.

 

***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.

 

Early Look: Golden Headfakes (12/2)

 

#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.

 

QE Conundrums – Draghi’s Misguided Intervention? (11/26)

 

#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.

 

#Bubbles: S&P500 Levels, Refreshed (11/18)

 

Best of luck out there,

 

DD

 

Darius Dale

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.



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