THEMATIC INVESTMENT CONCLUSIONS
Long Ideas/Overweight Recommendations
- Health Care Select Sector SPDR Fund (XLV)
- 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)
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
#Quad1 Lands Another Punch in the #Quad4 vs. #Quad1 Debate: In last Friday’s edition of the Hedgeye Macro Playbook, we went back to the well on what we think is the most important debate across the investment community – i.e. #Quad4 vs. #Quad1 in the U.S. In that note, we detailed how #Quad1 had finally “landed a punch” and, in the prose below, we show how proponents of #Quad1 are gaining incremental support from the domestic equity market.
Looking to our Tactical Asset Class Rotation Model (TACRM), we see that the sectors and style factors which have tended to outperform in historical instances of #Quad1 are starting to dominate the leader board as far as our proprietary Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) reading is concerned.
***Recall that our VAMDMI metric is simply the arithmetic mean of three independent z-scores of volume-weighted average price data, in which the three sample sizes (i.e. short-term, intermediate-term and long-term) accordion inversely to the trend in global financial market volatility. The metric is designed to standardize recorded momentum across securities and asset classes with variant betas, effectively normalizing the degree to which marginal investors might have a propensity to buy or sell a given market. Our emphasis on “marginal” is warranted due to the fact that the model is not programmed to be concerned with trailing price performance on longer durations; the velocity of the move is really all that matters as it relates to the proclivity of marginal investors chasing momentum in any given direction.***
Going back to our U.S. Equity Style Factor VAMDMI Ranker, we see that sectors and style factors which have tended to underperform in historical instances of #Quad4 continue to head up the rear – with the noteworthy exception of healthcare.
- 8 of the top 11 VAMDMI readings are pro-#Quad1 sectors and style factors: large-cap consumer discretionary (XLY), retailers (XRT), small caps (IWM), small-cap growth (IWO), broker-dealers (IAI), large-cap financials (XLF), regional banks (KRE) and small-cap value (IWN)
- 2 of the top 11 VAMDMI readings are pro-#Quad4 sectors and style factors: utilities (XLU) and REITs (VNQ)
- 7 of the bottom 11 VAMDMI readings are anti-#Quad4 sectors and style factors: gold miners (GDX), oil and gas E&Ps (XOP), oil servicers (IEZ), MLPs (AMLP), large-cap energy (XLE), large-cap materials (XLB) and semiconductors (SMH)
- 3 of the bottom 11 VAMDMI readings are pro-#Quad4 sectors and style factors: large-cap healthcare (XLV), pharmaceuticals (IHE) and biotech (IBB)
These signals are consistent with the very nascent trend of pro-#Quad1 sectors and style factors outperforming from a single-factor price performance perspective as well:
Obviously a couple of weeks of outperformance does not a trend make, but in the context of our GIP Model signaling a probable transition to #Quad1 in the upcoming quarter – which begins in two days – we think these are some of the most important signals emanating from global financial markets at the current juncture.
To the extent the U.S. equity market has legs to the upside – which Keith’s quantitative model continues to signal via consistent higher-highs of immediate-term resistance for the SPX (a la late-October) – we are starting to think the next phase of outperformance in the U.S. equity market is likely to come from those sectors and style factors most closely associated with #Quad1.
That is especially noteworthy in the context of the next recession being roughly 18 months away according to the trend in initial jobless claims or in the context of the relative healthiness of the broad equity market itself:
Stay tuned for our Q1 macro themes call, which is tentatively scheduled for January 8th at 1pm EST; we’ve had another fantastic year signaling the important phase transitions in macro and we don’t want to overstay our welcome with respect the thematic investment conclusions highlighted above.
***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: New Discoveries (12/29)
#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.