THE HEDGEYE MACRO PLAYBOOK

Takeaway: Today we focus extensively on our quant signals for clues as to whether it's safe to increase one's gross and/or net exposure (up here).

THEMATIC INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

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

Short Ideas/Underweight Recommendations

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

 

QUANT SIGNALS & RESEARCH CONTEXT

Global Macro #VolatilityAccelerating: If, like us, you’re having a terrible week from an asset allocation recommendation perspective, you can take solace in the fact that you’re probably in the top decile of performance from a MTD, QTD and YTD perspective.

 

THE HEDGEYE MACRO PLAYBOOK - 1

Source: Bloomberg L.P.

 

Conversely, if you’re in the “killing it” camp this week – which roughly implies the inverse of “top decile” with respect to MTD, QTD and YTD performance (the XOP is up +8.6% over the past two days; God help you if you were long E&Ps on the way down) – our sincere congrats to you as well. We’re all in this together; that’s what makes a market!

 

Looking to global financial markets through the deft lens of our Tactical Asset Class Rotation Model (TACRM), not much has changed despite the face-ripping squeeze we’ve seen across global equities over the last two-and-a-half days.

 

THE HEDGEYE MACRO PLAYBOOK - 2

Source: Bloomberg L.P.

 

THE HEDGEYE MACRO PLAYBOOK - 3

Source: Bloomberg L.P.

 

THE HEDGEYE MACRO PLAYBOOK - 4

Source: Bloomberg L.P.

 

Specifically:

 

  • At the primary asset class level, TACRM is generating “DECREASE EXPOSURE” signals for every asset class except Cash, which is comprised simply of U.S. dollars and volatility. Every primary asset class except Cash has a higher percentage of ETFs with a Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) reading below -1x (i.e. exhibiting a clear trend of negative VWAP momentum across multiple durations) than those greater than +1x (i.e. exhibiting a clear trend of positive VWAP momentum across multiple durations).
  • The Passive Trend Follower Asset Allocation estimations for Fixed Income & Yield Chasing, DM Equities, EM Equities, FX, Commodities and Cash of 21%, 20%, 10%, 3%, 10% and 36%, respectively, are little changed from where they started the week. Recall that this metric is designed to hone in on what asset classes(s) a “macro tourist” might be overweight or underweight by applying a consistent rules-based formula to increase or decrease exposure to a given asset class based on the breadth of momentum at the sub-asset class level. 
  • When looking for developing signals at sub-asset class level, we typically start with our Extreme Momentum Monitor, which highlights the top-20 and bottom-20 VAMDMI readings across the global macro universe of nearly 200 ETFs. Looking to the bottom-20 readings: 10 are EM Equity ETFs, 4 are DM Equity ETFs, 3 are FX ETFs and 3 are Commodity ETFs. That’s more-or-less the same composition we’ve seen in recent months. Looking to the top-20 readings: 10 are DM Equity ETFs (including the IWO!), 7 are Fixed Income & Yield Chasing ETFs, 1 is a Commodity ETF (WEAT), 1 is a FX ETF (UUP) and 1 is an EM Equity ETF (CHIX). That's a little changed from recent trends, but not by much. The full composition can be found in the fourth chart below.
  • Looking to the U.S. equity market, we see that 7 of the top 11 VAMDMI readings are sectors and style factors that are historically strong performers in #Quad4. The other 4 are sectors and style factors that are historically strong performers in #Quad1 (retailers, financials (2x) and small-cap growth). The #Quad4 vs. #Quad1 debate continues. Moreover, 7 of the bottom 8 VAMDMI readings are historically weak performers in #Quad4, including all the usual suspects across the energy and materials sectors. In spite of the bounce(s), nothing has changed from a momentum perspective to the preponderance of investors across multiple durations.
  • Interestingly, homebuilders (ITB) currently have the 10th lowest VAMDMI reading across the 47 sectors and style factors we track across the U.S. equity market. Given our team’s now-bullish fundamental research view on U.S. housing, we would look to this signal as a potential buying opportunity – provided key levels of long-term support remain intact.

 

THE HEDGEYE MACRO PLAYBOOK - TACRM GMRS

 

THE HEDGEYE MACRO PLAYBOOK - TACRM ACRM Delta

 

THE HEDGEYE MACRO PLAYBOOK - TACRM ACRM Percentile

 

THE HEDGEYE MACRO PLAYBOOK - TACRM 20 20

 

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

 

All told, not much, if anything, has changed with respect to the domestic and global macro risk matrix over the past few days. In light of that, one has to ask themselves 100-handles higher on the SPX if the coast is truly clear in terms of buying ‘em up here. It was a great trade for anyone who sold the top and bought the bottom, but the critical risk management question you should be asking yourself is: “Is the next 100-hanlde move on the SPX higher or lower from here?”.

 

We don’t have an answer to that question, but you can pretty much guess which outcome we think is more probable based on the aforementioned signals.

 

At the end of what has generally been a rough year across the industry, we hope these signals and research views are additive to your process of setting up for a successful 2015. Best of luck out there!

 

THE HEDGEYE MACRO PLAYBOOK - 10

Source: Bloomberg L.P.

 

***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.

 

(Hedg)Eye-Candy: Survey Says… (12/18)

 

#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.

 

Moscow, We Have a Problem (12/16)

 

#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,

 

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 – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective.


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