THEMATIC INVESTMENT CONCLUSIONS
Long Ideas/Overweight Recommendations
- Health Care Select Sector SPDR Fund (XLV)
- Consumer Staples Select Sector SPDR Fund (XLP)
- iShares National AMT-Free Muni Bond ETF (MUB)
- 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)
- SPDR S&P Oil & Gas Exploration & Production ETF (XOP)
- iShares MSCI European Monetary Union ETF (EZU)
- iShares MSCI France ETF (EWQ)
QUANT SIGNALS & RESEARCH CONTEXT
TACRM Generates an “INCREASE Exposure” Signal for DM Equities: For the first time since the week ended May 2nd, our Tactical Asset Class Rotation Model (TACRM) is NOT generating a “DECREASE Exposure” signal for DM Equities. This is because the quantitative model is now generating an “INCREASE Exposure” signal for the primary asset class, which is noteworthy for the following three reasons:
- It is now the only primary asset class with the aforementioned bullish notation, having wrestled away the reins from Cash, which is comprised simply of U.S. dollars (UUP) and the VIX (VXX).
- Its Passive Trend Follower Asset Allocation reading of 23% is “only” in the 57th percentile of readings on a TTM basis, which implies beta chasers have ample room to crowd back into this asset class, at the margins.
- From a backtesting perspective, the MSCI World Index has returned a cumulative +32.6% on a one-week forward basis since the start of 2008 during periods when TACRM is generating an “INCREASE Exposure” signal for DM Equities. That compares to an actual buy-and-hold return of +7.3% for the index over that same time period.
Why should you care about TACRM’s signaling capabilities at the primary asset class level? At a bare minimum, the model is better than bad at front-running phase transitions across the global macro landscape; at a bare maximum, it’s pretty darn good at doing just that.
Here are the most recent rotation-based signals TACRM has generated for each of the other five primary asset classes:
- Fixed Income & Yield Chasing: TACRM generated a “DECREASE Exposure” signal in the week-ended September 26th… terrible signal for Treasuries and bond-like equities; outstanding signal for high-yield bonds, EM debt and foreign currency-denominated bonds from the perspective of a U.S. investor (CLICK HERE to review our #Quad4 thesis)
- EM Equities: TACRM generated a “DECREASE Exposure” signal in the week-ended September 26th… outstanding signal (CLICK HERE and HERE to review our #EmergingOutflows thesis)
- Foreign Exchange: TACRM generated a “DECREASE Exposure” signal in the week-ended September 5th… outstanding signal (CLICK HERE to review our #Quad4 thesis)
- Commodities: TACRM generated a “DECREASE Exposure” signal in the week-ended August 8th… outstanding signal (CLICK HERE to review our #Quad4 thesis)
- Cash: TACRM generated an “INCREASE Exposure” signal in the week-ended September 5th… outstanding signal (CLICK HERE to review our #VolatilityAsymmetry thesis)
*charts sourced via Bloomberg L.P.
In the spirit of not arguing with basic arithmetic, both the historical backtest data and recent performance support heeding the “INCREASE Exposure” signal TACRM is now generating for DM Equities. To the extent you are looking to increase your allocation to said asset class:
- At the international level, we continue to like Japanese equities and anticipate material upside for the DXJ in the context of our structural bearish bias on the Japanese yen (FXY). CLICK HERE to review that thesis in full.
- At the domestic level, sector and style factor leadership is no longer as clear cut as it once was. Specifically, both #Quad4 (i.e. VNQ, XLU) and #Quad1 (i.e. XRT, ITB, IAI, XLY, IWM, IWO, XLF) are dominating the leader board from a Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) reading perspective. The relative supremacy of pro-#Quad1 sectors and style factors among the top-10 is fairly new as of the past few weeks and is something we will address on our Q1 Macro Themes call (1/8/15 at 1pm EST) as it relates to altering our thematic investment conclusions as listed 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.
#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.
#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.
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.