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[UNLOCKED] Flashback (7/20/2015): Dangerous New Highs for the Market?

Takeaway: A well-timed Macro research note from the Hedgeye vault. About stocks, Macro analyst Darius Dale asks if investors should "sell everything."

Editor's Note: Below is a particularly prescient Macro research note written by Hedgeye Senior Macro analyst Darius Dale and sent to institutional subscribers. It was published on July 20, 2015. The S&P 500 had just hit an all-time high and Dale laid out our bearish view on U.S. equities.

 

Well timed. The market ultimately tumbled -12% in August after that note was published. Dale's thinking is instructive for investors still wondering what is happening in the more recent stock selloff. We were and still are bearish.

 

[UNLOCKED] Flashback (7/20/2015): Dangerous New Highs for the Market? - Bubble bear cartoon 09.26.2014  1

 

After nearly two months under water, the benchmark S&P 500 has finally made a new all-time high. While optically impressive, there are a myriad of quantitative signals underneath the hood that do not support chasing the market here.

 

Immediate-term TRADE Duration Risk: The SPX is at the top end of its immediate-term risk range of 2,091-2,130.

 

With nearly 2% downside, 0% upside and the VIX nearing the low end of our 11.29-14.59 immediate-term risk range, investors would do well to book gains in U.S. equities here (i.e. reduce gross and/or tighten net exposures). As Keith highlighted on today’s Macro Show, if 2,091 breaks, there’s no support to 2,035.

 

[UNLOCKED] Flashback (7/20/2015): Dangerous New Highs for the Market? - SPX large

 

Intermediate-term TREND Duration Risk: Our Tactical Asset Class Rotation Model (TACRM) is now generating a “DECREASE Exposure” signal for U.S. equities. Currently, TACRM is generating a commensurate bearish signal for each of the six primary asset classes tracked by the model (slide 6).

 

Sell everything? As predicted in our previous refresh, the recent bullish-to-bearish reversals in Emerging Market Equities, Foreign Exchange and Commodities were, in fact, a harbinger for similar breakdowns across the Domestic and International Equities asset classes. Our recent decision to add SPY to the short side of our thematic investment conclusions confirm how we are thinking about this risk in real time. At the bare minimum, it implies investors would do well to reduce their gross exposure and/or tighten up their net exposure to global asset markets.  

 

CLICK HERE to learn more about TACRM, what these signals imply and how best to incorporate them into your investment process.

 

Long-term TAIL Duration Risk: Market breadth is broadly deteriorating and in dangerous territory.

 

One of the conventional “isms” of stock market analysis is that benchmark indices tend to peak very late into the economic cycle – well after broad-based signs of deterioration have emerged at the single-stock level.

 

In the face of a #LateCycle slowdown, benchmark indices are able to continue higher due to the fact that investors increasingly crowd into large-caps and/or stocks that have idiosyncratic growth opportunities that are less tethered to the [deteriorating] economic cycle, at the margins. Ultimately the cycle always prevails (see: 2000-2002 or 2007-2009), but positive absolute returns can be sourced from an increasingly narrow group of stocks and/or style factors well into the start of any given bear market.

 

[UNLOCKED] Flashback (7/20/2015): Dangerous New Highs for the Market? - SPX 2000 02

Source: Bloomberg L.P.

 

[UNLOCKED] Flashback (7/20/2015): Dangerous New Highs for the Market? - SPX 2007 09

Source: Bloomberg L.P.

 

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 for the sake of simplicity we track the percentage of stocks below their respective 50-day and 200-day moving averages in the Russell 3000 Index – which, at covering about 98% of the investable public equity market, makes it the broadest measure of the U.S. stock market.

 

On this measure, broad U.S. equity market breadth is as poor as it has been at any local peak since 10/9/07 – the previous cycle’s all-time high closing price for the SPX – surpassing the deterioration we saw at the 5/21/15 high, which was very much on par with the 7/19/07 local peak.

 

Current:

[UNLOCKED] Flashback (7/20/2015): Dangerous New Highs for the Market? - BMBI 7 20 15

 

October 9th, 2007:

[UNLOCKED] Flashback (7/20/2015): Dangerous New Highs for the Market? - BMBI 10 9 07

 

May 21st, 2015:

[UNLOCKED] Flashback (7/20/2015): Dangerous New Highs for the Market? - BMBI 5 21 15

 

July 19th, 2007:

[UNLOCKED] Flashback (7/20/2015): Dangerous New Highs for the Market? - BMBI 7 19 07

 

While not useful as a timing indicator, the aforementioned deterioration does imply the duration and scope for prospective returns are substantially worse than many investors may assume given consensus expectations for the length and strength of the current economic cycle, which we can loosely infer from consensus expectations for U.S. monetary policy.

 

Checking back in with TACRM, we are seeing market leadership increasingly concentrated amongst the exact style factors we’d expect to outperform in the latter innings of an economic and market cycle: large-caps (defensive safety and dividends), healthcare (increased consumption and the ability to maintain pricing power during economic downturns) and growth (many biotech and new tech companies don’t have earnings to speak of, therefore investors don’t have to worry about earnings misses derailing the momentum of the respective charts).

 

[UNLOCKED] Flashback (7/20/2015): Dangerous New Highs for the Market? - 8

 

All told, we hope you find these quantitative signals helpful with respect to your individual investment mandate. As always, feel free to email us with questions.

 

Best of luck out there,

 

DD

 

Darius Dale

Director


Under 60 Seconds: Twitter's Earnings Report

Hedgeye highlights three key points from Twitter's lackluster quarter

courtesy of our Internet & Media analyst Hesham Shaaban.


2 Charts That Aren't "Transitory" & Defy Fed Storytelling

Takeaway: Despite the December rate hike, Long Bond yields are falling. Meanwhile, the Fed says commodity deflation is "transitory."

2 Charts That Aren't "Transitory" & Defy Fed Storytelling - yellen pic

 

As we write this post, Fed head Janet Yellen is testifying before Congress. We have been highlighting how the Fed's economic forecasts are consistently wrong and serially overoptimistic. 

 

Most importantly, the Fed continues to call everything they have missed in the past year "transitory." Below are two charts that absolutely aren't transitory no matter what the Fed says.

 

1. The Fed hiked rates in December and yet Long Bond yields have plunged from 2.27% back then to 1.57% today. That's a macro market signal that growth is slowing but the Fed says it's all good. Who is right?

 

Janet?

 

2 Charts That Aren't "Transitory" & Defy Fed Storytelling - rate hike update

 

2. Yellen has consistently said that deflation is "transitory." The CRB Commodity index is down -33% from it's 2015 high.

 

Is that transitory?

 

2 Charts That Aren't "Transitory" & Defy Fed Storytelling - CRB Index

 

Bottom line: The Fed's credibility is crashing and macro market economic data continues to bear that out. Stick with the firm that called both #Deflation and #LowerForLonger (rates).


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20 Proprietary Risk Ranges

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FLASHBACK: McCullough On Wall Street Predictions, Audacity Of Central Planners & Long Bonds

Takeaway: These 3 videos summarize our top Macro calls that Wall Street completely missed.

FLASHBACK: McCullough On Wall Street Predictions, Audacity Of Central Planners & Long Bonds - consensus cartoon 07.29.2015

 

Macro markets are melting down. Wall Street completely missed it. Meanwhile, we've been hammering home these risks for a while now. Below are three videos from the Hedgeye vault that nicely lay out our market calls. 

 

1. "Whoops! A Look Back At Some of Wall Street’s Worst Predictions This Year" (12/15/2015)

 

We've been talking about #LowerForLonger (rates) for a while now. Wall Street's 2016 prediction for the yield on the 10-year Treasury is 3%. Today, it's at 1.6%.

 

 

2. "McCullough: Central Bankers Have Lost Control, Setting Stage For Market Crash" (2/26/2015)

 

We don't have much faith in central planners here at Hedgeye. Hedgeye CEO Keith McCullough continues to reiterate that "the biggest macro market risk is believing the Fed's serially overoptimistic forecasts."

 

 

3. McCullough: My Thoughts on Doug Kass’ Short Bonds Call (4/2/2015)

 

Some investors called shorting Long Bonds (TLT) the "trade of the decade." That's not working out too well with long bond yields crashing. That's been bullish for our long TLT call, which is up +17% versus down -8% for the S&P 500.

 

 


Do up your chin straps!

Client Talking Points

YEN

Post “negative yields” and the infinity-QE comments, the Yen has ramped and yields have crashed – this is the opposite of what central planners want (Down FX, Down Rates = Inflating Stocks) – Up Currency + Down Rates = #Deflation

Equities

Globally, crashing now – and in Europe the Up Euro + Down Rates example of #Deflation looks very obvious – DAX is down the least this am, -2.7% taking its crash to -29% from the 2015 top – Italy continues to implode, down another -4.5%.

10 Year

Our favorite liquid long idea remains the Long Bond – 10 year tagging 1.62% in the US this morning (our call is for lower-all-time lows on the long-end of the curve) - Yield Spread (10s/2s) crushed to new lows at 98bps wide – reiterating our fav Equity Sector Short (US Financials) on that.

Asset Allocation

CASH 66% US EQUITIES 0%
INTL EQUITIES 0% COMMODITIES 0%
FIXED INCOME 21% INTL CURRENCIES 13%

Top Long Ideas

Company Ticker Sector Duration
XLU

The bond market understands #GrowthSlowing. So do Utilities (XLU), which is why XLU is leading S&P sub-sector performance in 2016. XLU is up +7.6% versus down -8.0% for the S&P 500. Stick with it on the long side.  

GIS

GIS remains one of analyst Howard Penney's top Long ideas in the Consumer Staples space. As we have continued to say, it boasts style factors ideal in turbulent times; high market cap, low beta and liquidity. While GIS is down year-to-date, it's held up very well against the broader stock market. GIS is down -4% versus down -8% for the S&P 500 in 2016.

TLT

Down go growth expectations and down goes the yield curve. That's the latest from Macro markets last week and it plays right into our long Long-Term Treasuries (TLT) and short Junk Bonds (JNK) Investing Ideas.

 

The UST 10YR Yield declined another -9 basis points last week which helped boost TLT +1.1% on the week. In a healthy environment, bonds as an asset class go up in tandem, but JNK lost -0.9% on the week despite a falling yield curve. That’s because we’re NOT in an “all is good” environment. Credit spreads widen in turbulent times. This widening is the alpha-generating opportunity in long TLT, short JNK.

Three for the Road

TWEET OF THE DAY

World-Renowned Demographer Neil Howe Joins Hedgeye app.hedgeye.com/insights/49035… @HoweGeneration @KeithMcCullough

QUOTE OF THE DAY

"To be THE MAN, you gotta beat THE MAN! Woooooooooo!

-Ric "Nature Boy" Flair

STAT OF THE DAY

Ric "Nature Boy" Flair has won 16 world championships


ICI Fund Flow Survey | Bottom Fishing

Takeaway: Investors made more aggressive allocations last week with domestic equity having its first inflow in 19 weeks.

Investment Company Institute Mutual Fund Data and ETF Money Flow:

In the 5-day period ending February 3rd, investors made more aggressive allocations than they have in recent periods, drawing down -$4 billion of cash and making contributions to domestic and international equity mutual funds. Domestic equity funds experienced their first inflow in 19 weeks with investors contributing +$2.3 billion to U.S. stock funds. Additionally, international equity funds took in +$5.7 billion, their largest weekly subscription since April 2015. Passives continue to be a source of funds however with equity ETFs losing another -$8.8 billion (over $3.0 billion of this redemption was in the S&P 500 SPDR this week). In fixed income, fear abounds with taxable bond funds having its worst week in 5 with -$5.5 billion being withdrawn. Municipal bonds continued their winning streak, taking in +$1.2 billion, making it 18 straight weeks of tax-free inflows. Fixed income ETFs gained +$1.9 billion.


ICI Fund Flow Survey | Bottom Fishing - ICI1

 

In the most recent 5-day period ending February 3rd, total equity mutual funds put up net inflows of +$8.1 billion, outpacing the year-to-date weekly average outflow of -$917 million and the 2015 average outflow of -$1.5 billion. The inflow was composed of international stock fund contributions of +$5.7 billion and domestic stock fund contributions of +$2.3 billion. International equity funds have had positive flows in 41 of the last 52 weeks while domestic equity funds have had only 6 weeks of positive flows over the same time period.

 

Fixed income mutual funds put up net outflows of -$4.3 billion, trailing the year-to-date weekly average outflow of -$1.6 billion and the 2015 average outflow of -$463 million. The outflow was composed of tax-free or municipal bond funds contributions of +$1.2 billion and taxable bond funds withdrawals of -$5.5 billion.

 

Equity ETFs had net redemptions of -$8.8 billion, trailing the year-to-date weekly average outflow of -$5.6 billion and the 2015 average inflow of +$2.8 billion. Fixed income ETFs had net inflows of +$1.9 billion, trailing the year-to-date weekly average inflow of +$2.6 billion but outpacing the 2015 average inflow of +$1.0 billion.

 

Mutual fund flow data is collected weekly from the Investment Company Institute (ICI) and represents a survey of 95% of the investment management industry's mutual fund assets. Mutual fund data largely reflects the actions of retail investors. Exchange traded fund (ETF) information is extracted from Bloomberg and is matched to the same weekly reporting schedule as the ICI mutual fund data. According to industry leader Blackrock (BLK), U.S. ETF participation is 60% institutional investors and 40% retail investors.



Most Recent 12 Week Flow in Millions by Mutual Fund Product: Chart data is the most recent 12 weeks from the ICI mutual fund survey and includes the weekly average for 2015 and the weekly year-to-date average for 2016:

 

ICI Fund Flow Survey | Bottom Fishing - ICI2

 

ICI Fund Flow Survey | Bottom Fishing - ICI3

 

ICI Fund Flow Survey | Bottom Fishing - ICI4

 

ICI Fund Flow Survey | Bottom Fishing - ICI5

 

ICI Fund Flow Survey | Bottom Fishing - ICI6



Cumulative Annual Flow in Millions by Mutual Fund Product: Chart data is the cumulative fund flow from the ICI mutual fund survey for each year starting with 2008.

 

ICI Fund Flow Survey | Bottom Fishing - ICI12

 

ICI Fund Flow Survey | Bottom Fishing - ICI13

 

ICI Fund Flow Survey | Bottom Fishing - ICI14

 

ICI Fund Flow Survey | Bottom Fishing - ICI15

 

ICI Fund Flow Survey | Bottom Fishing - ICI16



Most Recent 12 Week Flow within Equity and Fixed Income Exchange Traded Funds: Chart data is the most recent 12 weeks from Bloomberg's ETF database (matched to the Wednesday to Wednesday reporting format of the ICI), the weekly average for 2015, and the weekly year-to-date average for 2016. In the third table are the results of the weekly flows into and out of the major market and sector SPDRs:

 

ICI Fund Flow Survey | Bottom Fishing - ICI7

 

ICI Fund Flow Survey | Bottom Fishing - ICI8



Sector and Asset Class Weekly ETF and Year-to-Date Results: In sector SPDR callouts, investors made large withdrawals from industrials and materials. The industrial XLY ETF lost -$277 million or -5% to redemptions. The materials XLB lost -$113 million or -6%.

 

ICI Fund Flow Survey | Bottom Fishing - ICI9 2



Cumulative Annual Flow in Millions within Equity and Fixed Income Exchange Traded Funds: Chart data is the cumulative fund flow from Bloomberg's ETF database for each year starting with 2013.

 

ICI Fund Flow Survey | Bottom Fishing - ICI17

 

ICI Fund Flow Survey | Bottom Fishing - ICI18



Net Results:

The net of total equity mutual fund and ETF flows against total bond mutual fund and ETF flows totaled a positive +$1.6 billion spread for the week (-$774 million of total equity outflow net of the -$2.4 billion outflow from fixed income; positive numbers imply greater money flow to stocks; negative numbers imply greater money flow to bonds). The 52-week moving average is +$724 million (more positive money flow to equities) with a 52-week high of +$20.5 billion (more positive money flow to equities) and a 52-week low of -$19.0 billion (negative numbers imply more positive money flow to bonds for the week.)

  

ICI Fund Flow Survey | Bottom Fishing - ICI10

 


Exposures:
The weekly data herein is important for the public asset managers with trends in mutual funds and ETFs impacting the companies with the following estimated revenue impact:

 

ICI Fund Flow Survey | Bottom Fishing - ICI11 



Jonathan Casteleyn, CFA, CMT 

 

 

 

Joshua Steiner, CFA







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