THE HEDGEYE MACRO PLAYBOOK

Takeaway: In today's Macro Playbook, we quantitatively evaluate the systemic risk in the U.S. equity market and offer our thoughts on what to buy.

THEMATIC INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

  1. Consumer Staples Select Sector SPDR Fund (XLP)
  2. Health Care Select Sector SPDR Fund (XLV)
  3. iShares U.S. Home Construction ETF (ITB)
  4. PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
  5. iShares 20+ Year Treasury Bond ETF (TLT)
  1. LONG BENCH: Vanguard REIT ETF (VNQ), Utilities Select Sector SPDR Fund (XLU), Vanguard Extended Duration Treasury ETF (EDV)

Short Ideas/Underweight Recommendations

  1. iShares TIPS Bond ETF (TIP)
  2. CurrencyShares Japanese Yen Trust (FXY)
  3. SPDR Barclays High Yield Bond ETF (JNK)
  4. iShares MSCI Emerging Markets ETF (EEM)
  5. Industrial Select Sector SPDR Fund (XLI)
  1. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)

QUANT SIGNALS & RESEARCH CONTEXT

Is the U.S. Equity Bubble Finally Popping?: After a -3.8% draw-down from its 12/29 peak, the S&P 500 is now down -2.3% for the YTD – its worst start to the year since 2009. Every time the VIX gets above the 20, you almost can hear the equity bear community shout in unison, “aha – this is it!”.

Is this it? While no one knows for sure, we do have a variety of quantitative tools that can not only help answer that question, but also a potentially more important question of: “What sectors and style factors should we be invested in?” (for the majority of you who must remain fully invested).

Step #1 is checking in with our proprietary quantitative factoring of price, volume and volatility. On this metric, the S&P 500 closed just below our intermediate-term TREND line of 2020. A bounce today would imply this key support level held; a sustained draw-down through this level on accelerating volume would surely portend a test of our long-term TAIL line of support at 1938.

THE HEDGEYE MACRO PLAYBOOK - SPX

Recall that in our 12/22 edition of the Hedgeye Macro Playbook, we discussed how the U.S. equity market tends to peak well after broad-based deterioration at the single stock level and that the degree of deterioration at the 12/5 peak was well shy of most recent bull market top. On this metric, the 12/29 peak is substantially less worrisome than the 10/9/07 peak and more closely resembles the 12/5/14 peak than all of the other noteworthy peaks along the way.

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:

THE HEDGEYE MACRO PLAYBOOK - BMBI 10 9 07

December 5, 2014 peak: a noteworthy degree of negative momentum, with nearly 40% of all stocks below their 200DMAs:

THE HEDGEYE MACRO PLAYBOOK - BMBI 12 5 14

December 29, 2014 peak: some negative momentum, with nearly a third of all stocks below their 200DMAs, but 75% of all stocks were still above their 50DMAs:

THE HEDGEYE MACRO PLAYBOOK - BMBI 12 29 14

Looking at the U.S. equity market through the lens of our Tactical Asset Class Rotation Model (TACRM) recall that at the start of last week we discussed how this model generated an “INCREASE Exposure” signal for DM Equities for the first time since early May.

Why is that important?

It is important because our backtest analysis shows the MSCI World Index has returned +31.5% on a cumulative 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 +4.8% for the index over that same time period.

THE HEDGEYE MACRO PLAYBOOK - TACRM DM Equities Backtest

With the market relatively healthy from a momentum breadth perspective and with TACRM is giving a green light to the primary asset class, it is reasonable to conclude that this is a buying opportunity – assuming our TREND line of support holds.

So what do you buy?

Well, only 13 of the 47 sectors and style factors we track within the U.S. equity market have a positive Volatility-Adjusted Multi-Duration Momentum Indicator (VAMDMI) readings. Per usual, the leader board is dominated by those sectors and style factors that typically outperform in #Quad4: REITs (VNQ), health care (IHE, IBB, IHI, XLV), utilities (XLU), staples (XLP) and low-volatility (USMV). #Quad1 continues to percolate here and there with the homebuilders (ITB), retailers (XRT) and small-cap growth (IWO) showing relative strength as well. It’s worth mentioning that gold miners (GDX) have also snuck their way into the top-10 VAMDMI readings, but we’re treating that as a head fake for now.

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

Our call is simple: what for our oversold signals to leg into early-cycle and #Quad1 sectors and style factors in lieu of late-cycle and #Quad4.

When we finally feel comfortable “backing up the truck” on #Quad1, we’ll be sure to flag those changes in our thematic investment conclusions above. Patience has paid off for us and we see no need to abandon the #process here after several strong quarters of sector and style factor selection.

***CLICK HERE to download the full TACRM presentation.***

TRACKING OUR ACTIVE MACRO THEMES

Global #Deflation: Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds.

The Hedgeye Macro Playbook (1/12)

#Quad414: After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.

Early Look: Creatively #Patient (1/14)

Long #Housing?: The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014.  2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex.

Mortgage Apps | Seasonal Wheel-Spinning (1/7)

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.