“Develop amnesia conveniently and forget everything you heard!”
-Team Rocket Grunt
As you may have guessed, I’m not a big gamer. That said, the video-game stocks were one of the first sub-sectors of “consumer” my boss gave me to follow as a hedge fund analyst back in 2000-2001. Anyone remember a stock called Midway Games?
While it would have been fun to have had an analyst nail this Nintendo (Pokemon Go!) call in 2016, I’m not so sure it’s going to be fun for whoever chased “the chart” at last week’s highs. Overnight, Nintendo’s stock dropped -17.7%.
With the SP500 registering another all-time closing high at 2175 on Friday, I don’t get the sense that there’s an American mania developing in Betamon Go! Total US Equity Volume actually crashed on the “news”, down -23% vs. its 1-year average.
Back to the Global Macro Grind…
Unlike other Pokemon Trainer classes, Team Rocket Grunt trainers are never given individual names. They’d be a perfect class of perma US stock market cheerleaders. Forget accountability – develop bull cases conveniently, and change them often!
The latest bull case for US stock market beta is one we helped lead. We’ll get the river card on our Street high forecast for Q2 US GDP growth in Q2 tracking at +4.8% q/q SAAR (+2.3% year-over-year) on Friday. Rates and USD are running up ahead of that.
Not everyone was a winner on last week’s #StrongDollar (+0.9% week-over-week) move though:
- Long Bond Bulls lost another 2 beeps week-over-week with the 10yr rising to 1.57% = -70 bps YTD
- Gold Bulls saw a correction of -0.3% week-over-week, with Gold correcting to $1331 = +25.1% YTD
- Oil Bulls got tagged for another -5.3% weekly deflation which puts WTI at only +4.2% YTD
Remember when the narrative was “Oil is breaking out – as oil goes, stocks go”? Ha! Not to be confused with the summer of 2015 bull case that “low gas prices” were going to stimulate the consumer, you really need to develop amnesia on oil risk.
Got #Deflation of the “reflation” theme? With the US Dollar Index +4% in the last month:
- The CRB Index (19 commodities) is down -4.6%
- Oil (WTI) is down -11.2%
- The SP500 is +4.3%
That’s right. While it’s still underperforming TLT and GLD by a country mile in 2016, the SP500 is outperforming Oil now. That’s why it’s time for some serious SPY Go chart chasing!
Looking at last week’s futures & options (CFTC) positioning, the Beta Chase is not an exaggeration:
- SP500 (Index + E-mini) net LONG position increased by +94,526 contracts to +154,099 contracts
- The 6-month and 1-year average net positions are net SHORT averages of -54,383 and -100,426 contracts
- The current net LONG position registers a z-score of +2.37x (that’s the biggest in all of Global Macro)
People might say they are (or were) bearish. But their portfolios are definitely not positioned that way. Maybe everyone has to be long ahead of a hot US GDP print. I don’t disagree with that. But at what point is a big Q2 GDP print priced in?
Then there’s the poor Fed…
What happens if Q2 GDP is big… they get all cocky again about a rate hike… and both employment and inflation slow, sequentially, when the JUL data is reported?
We’re going with amnesia (for now) but it’s still important to realize it’s Q3 (where GDP will slow, again).
After pulling back in the week prior, maybe that’s why Utilities (XLU) beat beta (SPY) again last week. From a Sector Style perspective, this is how the week looked, in context vs. SP500 +0.6%:
- Utilities (XLU) +1.5% to +21.9% YTD
- Financials (XLF) +0.7% to -0.6% YTD
- Energy (XLE) -1.3% to +13.3% YTD
I know. Being overweight the Financials with the 10yr UST Yield still in crash mode (-31% or 70 basis points YTD) in 2016 has been awful on both an absolute and relative basis.
And with the VIX back at 12, you’re going to have to try to forget everything you’ve heard about “GDP accelerating in Q2” so that you can re-short the Betamon (XLF) bounce on Friday’s GDP news!
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr Yield 1.45-1.64%
Oil (WTI) 43.09-45.61
Best of luck out there this week,
Keith R. McCullough
Chief Executive Officer