THEMATIC INVESTMENT CONCLUSIONS
Long Ideas/Overweight Recommendations
- iShares National AMT-Free Muni Bond ETF (MUB)
- Consumer Staples Select Sector SPDR Fund (XLP)
- Health Care Select Sector SPDR Fund (XLV)
- Vanguard Extended Duration Treasury ETF (EDV)
- iShares 20+ Year Treasury Bond ETF (TLT)
Short Ideas/Underweight Recommendations
- iShares Russell 2000 ETF (IWM)
- SPDR S&P Regional Banking ETF (KRE)
- iShares MSCI European Monetary Union ETF (EZU)
- iShares MSCI France ETF (EWQ)
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
QUANT SIGNALS & RESEARCH CONTEXT
More Upside for the S&P 500?: One of the conventional “isms” of stock market analysis is that benchmark indices tend to peak well after broad-based signs of deterioration have emerged “underneath the hood”, so to speak.
There’s a number of ways to measure market breadth on a trending basis (e.g. % of stocks making new highs, % of stocks correcting, % of stocks crashing, etc.), but we thought we’d focus on a very simple measure(s) in order to hone in on where we might be in the context of the U.S. stock market cycle. Such honing in is especially critical in the context of what some have termed the “7-year itch”: 2000 bull-market top => 2007 bull-market top => 2014 bull-market top?
In the charts below, we show the percentage of Russell 3000 constituent stocks that were below their respective 50-day and 200-day moving averages at critical closing price highs in the S&P 500 since mid-2007, ultimately comparing recent peaks with what we have seen historically. Obviously simple moving averages are what they are – i.e. simple – but to the extent we're only using them to measure momentum and NOT to manage risk, we think they are an appropriate measure for our study.
The key takeaway is that the current degree of momentum deterioration at the single stock level is well shy of the October 2007 bull-market top, which would tend to support any belief that this current bull market has further upside. How much upside is a conclusion we unfortunately cannot draw from this (or any other) analysis, but at the very least it remains directionally bullish – for now.
July 19, 2007 peak: a considerable degree of negative momentum, with just shy of half of all stocks below their 50DMAs:
October 9, 2007 peak: a substantial degree of negative momentum, with over half of all stocks below their 50DMAs and nearly 60% of stocks below their 200DMAs:
April 23, 2010 peak: a substantial degree of positive momentum, with the overwhelming majority of stocks above their 50DMAs and 200DMAs:
April 29, 2011 peak: a substantial degree of positive momentum, with the overwhelming majority of stocks above their 50DMAs and 200DMAs:
April 2, 2012 peak: a substantial degree of positive momentum, with the overwhelming majority of stocks above their 50DMAs and 200DMAs:
September 14, 2012 peak: a substantial degree of positive momentum, with the overwhelming majority of stocks above their 50DMAs and 200DMAs:
September 18, 2014 peak: a considerable degree of negative momentum, with just shy of half of all stocks below their 50DMAs and 200DMAs:
December 5, 2014 peak: a noteworthy degree of negative momentum, with nearly 40% of all stocks below their 200DMAs:
Last price: a noteworthy degree of negative momentum, with nearly 40% of all stocks below their 200DMAs:
Again, this analysis does not imply a considerable degree of further upside for the SPX; nor does it imply that we are now broadly bullish on the U.S. equity market.
That being said, we remain bullish on the sectors and style factors that have tended to outperform in historical instances of #Quad4 (i.e. healthcare, consumer staples, utilities, REITs and mega-caps) and this analysis would support an expectation of positive absolute returns for those exposures from here to the extent that market beta remains positive.
On that note, Keith's immediate-term risk range for the SPX currently has upside to 2090 and the index remains bullish TREND and TAIL as well. Given the current "poor, but not terrible" state of trending market breadth, one could argue that we need to see a substantial degree of deterioration at the single stock level over the next ~20 point rally for any price near 2090 to be the ultimate crescendo of this raging bull market.
***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.
Does Your View on Rates Include the Risk of a “Reflexive Deflationary Spiral”? (12/19)
#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,
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.