[Unlocked] Keith's Daily Trading Ranges

Editor's Note: This is a complimentary look at today's Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers weekday mornings by CEO Keith McCullough. Click here to subscribe.

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Takeaway: We are flagging First American (FAF - Score: 17) as a long on sentiment and short interest.

This morning we are publishing our updated Hedgeye Financials Sentiment Scoreboard in conjunction with the release of the latest short interest data last night. Our Scoreboard now evaluates over 300 companies across the Financials complex.


The Scoreboard combines buyside and sell-side sentiment measures. It standardizes those measures to an index of 0-100, where 100 is the best possible sentiment ranking and 0 is the worst. Our analysis shows that a contrarian strategy can be employed successfully by taking the other side of stocks with extreme readings in sentiment, either bullish or bearish. Once sentiment reaches these extreme levels, it becomes a very asymmetric setup wherein expectations become too high or too low.  


We’ve quantified the tipping points for high and low sentiment. Specifically, we've found that scores of 20 or lower have a positive, average expected return while scores of 90 or greater are more likely to underperform.


Specifically, our backtest of 10,400 observations over a 10-year period found that stocks with scores of 0-10 went on to produce an average absolute return of +23.9% over the following 12-month period. Scores of 10-20 produced an average absolute return of +11.9%. At the other end of the spectrum, stocks with sentiment scores of 90-100 produced average negative absolute returns of -10.3% over the following 12-months.


The first table below breaks the 300 companies into a few major categories and ranks all the components on a relative basis. The second table breaks the group into smaller subsectors and again gives them relative rankings within those subsectors. 


This week we're flagging First American (FAF - Score: 17) as a long as our 3Q15 call to "hide out" in Housing favors the title insurers. We are also highlighting Federated Investors (FII - Score: 13) as screening well from both a sentiment/short interest and a fundamental research standpoint (see our latest FII research HERE). FII stock is one of the few asset management stocks that is up year-to-date in 2015.








The following is an excerpt from our 90 page black book entitled “Betting Against the Herd: Generating Alpha From Sentiment Extremes Across Financials.”


Let us know if you would like to receive a copy of our black book, which explains this system and its applications.


BUYS / LONGS: Financials with extremely low sentiment readings of 20 and below on our index (0-100) show strong average outperformance in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 20 or lower rise an average of +15.1% over the next 12 months in absolute terms.   


SELLS / SHORTS: Financials with extremely high sentiment readings of 90 and above on our proprietary sentiment index (0-100) demonstrate a marked tendency to underperform in absolute and relative terms across 3, 6 and 12 month subsequent durations.  Stocks with sentiment ratings of 90 or greater fall in value an average of -10.3% over the next 12 months in absolute terms. 



FINANCIALS SENTIMENT SCOREBOARD - First American (FAF) - Absolute 12 mo



Joshua Steiner, CFA


Jonathan Casteleyn, CFA, CMT

Euro, DAX and Volatility

Client Talking Points


The EUR/USD is trading down 90 basis points this morning as the prospect of the ECB’s Mario Draghi talking down the currency at the Jackson Hole meeting increases. “We’ll do whatever it takes” Part 2?  We continue to call for growth slowing in the Eurozone (Q3 macro theme = #EuropeSlowing). We expect the Fed to raise rates ahead of the ECB and political and fiscal issues throughout the Eurozone to put downside support on the cross. This morning the ECB’s Vice President Vitor Constancio said the ECB will take further measures if it sees a significant risk to the outlook for inflation.


Down -5.8% week-over-week, the DAX index has been crushed along with its European peers, standing at a mere +2.5% year-to-date. If Germany with its exporting powerhouse (46% of GDP) alongside a weakened EUR/USD can't offset itself from the pack, who can?  Our #EuropeSlowing call includes the ECB’s inability to move inflation far from the zero bound.  


For much of the past 3.5 years, the VIX has been range-bound between 10-20, with occasional blips to 25 on front-month contracts. Yesterday’s close of 36.02 confirms a bullish phase transition for U.S. equity volatility that is unlikely to go away anytime soon. The move was eerily reminiscent of the 8/8/11 rip in the VIX that preceded several months of 30+ VIX closes. With the Fed gearing up to make a policy mistake in the coming months, could we be looking at a similar setup?


**Tune into The Macro Show with Hedgeye CEO Keith McCullough at 9:00AM ET - CLICK HERE

Asset Allocation


Top Long Ideas

Company Ticker Sector Duration

One of the ways that McDonald's is going to take market share back is through one of the most popular items on its menu—the Egg McMuffin. "I honestly believe that if there is a silver bullet, it’s all day breakfast for McDonald’s," says Restaurants Sector Head Howard Penney. "And I do believe they’re going down that road and they will do it."


Penney adds that we’ll probably know more about that at the November analyst meeting and what the breakfast potential will be. There’s obviously a lot of things that go around MCD doing breakfast (e.g. shrinking other parts of the menu, etc).


"We continue to like Penn National Gaming here due to stable regional gaming trends, better than expected quarterly and annual earnings, and the Plainridge and Jamul contribution to PENN’s two-year growth story," writes Hedgeye Gaming, Lodging & Leisure Sector Head Todd Jordan. 


It was a very good week for those sitting behind the long-bond coming out of the FOMC minutes release on Wednesday. During a tumultuous 5-day stretch in which the S&P 500 fell over -5%, subscribers who followed our recommendation on TLT were sheltered from the market storm and gained almost +2%. Moreover, during the past month, TLT has gained +5.7% versus a -6.8% loss for the S&P 500 (a 1,200 basis point difference). In other words, it has paid handsomely to buck the consensus tide.

Three for the Road


5 Reasons Why the Fed Won’t Raise Interest Rates in 2015 … via @HedgeyeDJ



Keep your eyes on the stars and your feet on the ground.

Franklin D. Roosevelt


New Home Sales in July were New Home Sales were +5.4% month-over-month and +26% year-over-year.

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CHART OF THE DAY: Homebuilders: Sector Quant | $ITB

Editor's Note: The chart and excerpt below are from today's Early Look. This morning's note was written by our U.S. Macro Analyst Christian Drake. For more info on subscribing click here.  


Is great not good?   If you can’t be long the best fundamental data in the USA (& best rate-of-change #’s in all of global macro), what can you be long?  


Gundlach now says “Watch Out Below”, Dalio now says the next big policy initiative may be easing, not tightening.  Hedgeye has been reiterating the bond bull and global growth-slowing call for ~9-months.  The asset allocation and prospective policy implications are largely implicit. 


CHART OF THE DAY: Homebuilders: Sector Quant | $ITB - HB CoD2

Life's Belt

"In the land of the blind, the one-eyed man is king." 

-Desiderius Erasmus Roterodamus


I haven’t run more than 2 miles in probably 6 years.  I woke up and ran 8 miles at 2:30 am this morning - Because I can. 


My grandmother went into hospice late last week.  By (unfortunate and too frequent) experience, a familiar emotional and mental rhythm accompanies the time between terminal diagnosis and passing.   


The period is profound and is typically characterized by self-reflection and a renewed appreciation for the fleetingness of time and delicacy of life.  Born of that life-contemplation is deepened gratitude and vows of change and self-betterment. 


Remarkably, however, and, again, by experience, the human tendency towards transience is equally profound.  High-entropy life events which, in the moment, carry the impetus for lasting physical/spiritual/psychological transformation rarely result in material personal metamorphosis.


How long until the hum-drummings of daily life scuttle the renewed appreciation for family?  How long until double cheeseburgers again replace early AM exercise sessions or social media supplants meditation?  How long until the mental “this time is different” edifice implodes under the weight of its own artifice?


If there’s an investment parallel in this existential drudgery, it’s probably the shortness of market memory.  “This time is different” and “if everyone is wrong, no one is wrong” are sirenic contrivances of an institutionalized market. 


Anyhow, in other Non-Conventional news, we increased the cash position in the Hedgeye Asset Allocation model to >60% ahead of and through the latest bout of global tumult – Because we can.  


Life's Belt - NHS CoD1


Back to the Global Macro Grind …


Following last week’s higher post-crisis high in Existing Home Sales, we contextualized the current setup for housing in the following way: 


Better than Beta | When Good is Great:  Asset investibility is relative and when growth gets scarce, the growth that exists gets bid.  Housing’s rate-of-change transition from great to good in 3Q has proved a winner relative to the double decrement - from okay to bad -  in global growth and inflation trends.   Further, the recent retreat in rates – stemming largely from OUS turmoil – has further supported the relative case for domestic housing leverage over the nearer-term as affordability can tread water in the face of higher prices.  Even domestically, with business investment (still) flagging and rising personal savings stymieing an acceleration in domestic consumerism, housing and resi investment sit among a select set of absolute and relative macro performers.  Indeed,  the shelter component of inflation which represents ~32% of the CPI basket, remains the singular source of strength buttressing the headline and core CPI readings as disinflation/deflation prevail across the preponderance of goods and services prices.    


Recall, this perfectly subjective gem of a question from the BLS anchors the CPI report and the Fed’s view of Inflation’s reality: 


“If someone were to rent your home today, how much do you think it would rent for monthly, unfurnished and without utilities?”


Moving on.


Yesterday, we got the July update on the 9% of the Housing market that is New Home Sales.   


  • The Data: New Home Sales = +5.4% MoM and +26% YoY!
  • The Detail: As can be seen in the Chart of the Day above, July represented a quirky month from a comp perspective.  Year-over-year comps begin to steepen considerably in 3Q (July comp =+7% vs June = -12%) but the sequential was easy given last month’s brick of a print and, on an absolute basis, July 2014 represented the lowest level of sales in 2-years. 
  • The Distillation:  In the immediate-term the comp setup for NHS is less favorable while the longer-term mean reversion opportunity in the New Home Market remains both conspicuous and favorable relative to the magnitude of upside available in the existing market (which has already mean reverted back to average levels of activity).  Further, in a global environment characterized by price deflation and 0% +/- growth, a deceleration to low-teen’s sales growth may indeed be the Cyclops in a blind Macro land. 


We also received the latest update on Home prices via the Case-Shiller and FHFA HPI reports.  As we’ve highlighted repeatedly, the trend in HPI is important because it exhibits a strong contemporaneous relationship with housing related equity performance.  


  • The Data:  The Case-Shiller 20-City HPI for June – which represents average price data over the April-June period – showed home prices declining -0.12% MoM while holding flat at +4.9% year-over-year.  On an NSA basis, all 20 cities reported sequential increases while, on an SA basis, 10-cities reported declines.
  • The Detail:  For the 2nd consecutive month, the 20-city series and the National HPI (which covers all U.S. Census divisions ) have shown divergent, 2nd derivative trends.  Whereas the 20-city series showed modest deceleration, the National HPI showed modest acceleration.  This dynamic stems largely from the index weighting methodology and the fact that index heavyweights New York, San Francisco and Chicago all showed MoM declines and sequential YoY deceleration
  • The Distillation:  The deceleration in the 20-city series stands in contrast to both the CoreLogic HPI for June and the multi-month trend in the FHFA HPI series which continue to reflect accelerating price growth.   As it stands, we remain inclined to side with the CoreLogic/FHFA data as it's more leading and accords with the rising demand, tightening supply dynamic prevailing currently.   


So … Domestic Residential Housing … a white knight amidst the legion of Global Macro Gloom.  Right?


ITB = -5% on the day yesterday amidst the beta bloodletting (& juiced by TOL earnings)


Is great not good?   If you can’t be long the best fundamental data in the USA (& best rate-of-change #’s in all of global macro), what can you be long?  


Gundlach now says “Watch Out Below”, Dalio now says the next big policy initiative may be easing, not tightening.  Hedgeye has been reiterating the bond bull and global growth-slowing call for ~9-months.  The asset allocation and prospective policy implications are largely implicit. 


Tops are processes (not points), valuation is not a catalyst and, conveniently, risk managing the immediate term carries the added benefit of appropriately positioning oneself for intermediate-term risks.  I explained the practical implementation of our process in an Early Look last month, but it’s worth re-iterating as the signal serves to identify when you should be buying the dips and whether you should be buying or selling into strength: 


Fading Beta Redux:  When something is at the top end of its immediate-term risk range, you sell some.  When it retraces to the bottom end of its risk range, you buy some more – provided that the security holds TRADE support.  If it breaches TRADE support to the downside – that’s fine - you are out of the way (or underweight) and can wait for a test and hold of TREND support before buying back the exposure.  If the security breaches TREND support, again, you are out of the way for a potentially large gap down to TAIL support. 


As it stands, every S&P Sector is currently bearish TRADE & TREND in the @Hedgeye model.  Select securities may present compelling short-term long opportunities but, in this setup, attempting to knife-catch beta is not an exercise in fiduciary excellence.   


re-think, re-learn, re-work.


After dropping my son off for his first day of kindergarten this morning, I’ll head back over to the hospital.  Life – and markets – cycle.


Our immediate-term Global Macro Risk Ranges are now:


UST 10yr Yield 1.98-2.13% 

SPX 1 
RUT 1077-1170 

VIX 24.44-45.42 
USD 93.36-95.79
Oil (WTI) 38.04-40.99


To notches in Life’s Belt,


Christian B. Drake

U.S. Macro Analyst


Life's Belt - HB CoD2


August 26, 2015

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