Long Ideas/Overweight Recommendations
- iShares National AMT-Free Muni Bond ETF (MUB)
- Consumer Staples Select Sector SPDR Fund (XLP)
- iShares 20+ Year Treasury Bond ETF (TLT)
- Vanguard Extended Duration Treasury ETF (EDV)
- Health Care Select Sector SPDR Fund (XLV)
Short Ideas/Underweight Recommendations
- SPDR S&P Regional Banking ETF (KRE)
- iShares MSCI European Monetary Union ETF (EZU)
- iShares MSCI France ETF (EWQ)
- iShares Russell 2000 ETF (IWM)
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
QUANT SIGNALS & RESEARCH CONTEXT
One of These Things Is Not Like the Other: Well, make that a few of these things. One of the things we’re watching intently on a day-to-day basis is whether or not the market starts to price in a transition from #Quad4 to #Quad1, which we continue to anticipate is the next logical stop on our GIP Model.
In the process of attempting to front-run the aforementioned phase transition, we are employing our Tactical Asset Class Rotation Model (TACRM) to ardently watch for two signals from the U.S. equity market:
- Historically strong #Quad4 sectors and style factors ceding leadership – from a Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) perspective – on a trending basis
- Historically strong #Quad1 sectors and style factors gaining leadership – from a VAMDMI perspective – on a trending basis
Why do we anchor on our proprietary VAMDMI reading rather than single-factor price momentum? Because we have no clue from what duration the preponderance of investors are measuring momentum on – other than that as volatility accelerates, the average investor shortens his/her investment horizon (something we solve for in TACRM).
In light of that, all we can do is record and amalgamate price momentum from multiple durations, adjusting for volatility in the process. This process gives us the best probability of determining where an investor might feel compelled to chase outperformance or blow out of underperforming exposures.
Isolating our search to the top-10 U.S. equity sectors and style factors we track in TACRM (47 in total), we see that 4 of those 10 are fairly new entrants and can be attributed to #Quad1 expectations (Financials: XLF, IAI, KIE; Tech: SMH), while the other 6 are unequivocal winners in #Quad4 (Healthcare: XLV, IBB, IHE, IHI; REITS: VNQ; Utilities: XLU) and have remained in/around the top-10 for months. Moreover, 9 of the bottom-11 VAMDMI readings are sectors and style factors are distinct losers in #Quad4 (Energy: XLE, AMLP, XOP, IEZ; Materials: XLB, GDX; Small-to-Mid Caps: IWM, IWN, IWO) and have also remained in/around the bottom-10 for months.
All told, it can be said that the market continues to price in #Quad4 at the sector and style factor level.
While it’s easy for an investor to get lost in attempting make an all-or-nothing call on the broader market, the real outperformance of 2014 has been sourced from getting the direction of interest rates right as it pertains to slow-growth, yield-chasing sectors, as well as nailing the turn from #InflationAccelerating in 1H15 to #Quad4 in 2H15. We may have gotten a lot of things wrong along the way, but we definitely got those two BIG macro calls right!
***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: Party Hard? (12/8)
#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.
Draghi Didn’t Deliver the “Drugs”! (12/4)
#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: “Hedge Fund Hotel” Edition (Part II) (12/8)
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 – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.