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“My brain is open!”

-Tim Harford

After registering yet another all-time closing high for the US stock market (SP500 = 2277) on Friday, is your brain open? Very few get good at this being mentally inflexible and politically dogmatic.

Harford is the author I cited last week. He wrote Messy and he uses the aforementioned quote to effectively bridge the gap between chapters 1 and 2 of the book which are titled Creativity and Collaboration.

Alongside Conflicts of Interest (tough to get good at this with those in your research too!), I think those are 3 C’s to always consider when trying to evolve and improve your research and risk management #process.

Open Minds - Wall Street cartoon

Back to the Global Macro Grind…

While it may seem creative and collaborative to spend the day fear mongering about a #StrongDollar, it’s not paying the bills – and really hasn’t now for 2-3 months. The 90-day correlation between the SP500 and USD = +0.79.

On the heels of a ‘meh’ jobs report for December, macro markets responded with yet another Dollar Up, Rates Up, Stocks Up (especially higher beta growth stocks) day. That got USD back to flat for this 1st trading week of 2017.

I say ‘meh’ on the US monthly labor report because, for headline absolutists, that’s what it was. Rate of change people acknowledged what the growth rate in Non-Farm Payrolls (NFP) has been doing since peaking in FEB of 2015 (it slowed):

  1. Reminder (see Chart of The Day), NFP peaked at +2.3% growth in FEB 2015 and has only slowed since
  2. December slowed 8 basis points to 1.51% (from 1.59% in NOV)
  3. The DEC print was the lowest growth rate of US job gains of 2016 (don’t expect Obama to mention that)

Yep. That’s yesterday’s news now. And since markets are forward looking discounting mechanisms, what Mr. Macro Market is suggesting on Dollar Up, Rates Up, Stocks Up is that #JobsSlowing (2016) may be done slowing in JAN-MAY…

Huh? Yeah, go all creative-mind for me for a second and consider what might happen, in rate of change terms, as NFP starts to compare against slowing monthly jobs reports that drove US Bond Yields to all-time lows in Q2 of 2016…

You don’t need to collaborate with many to remember that May 2016 jobs bomb of 24k net jobs and/or not to forget why the Fed had to keep pivoting back to dovish, multiple times, in the 1H of 2016 as a result of GDP #GrowthSlowing.

Ask former Long Bond Bulls – we remember!

While there should be an air pocket in the US #GrowthAccelerating data, at some point in FEB-APR (how’s that for an unclear catalyst to wait and whine on, from repeated all-time SPY highs), that’s mid to late Q1, and it’s still January…

And you have both the Trump Coronation (JAN 20th – ask him, it’s going to be very massively youge on rhetoric) and continued growth and inflation data accelerating ahead into FEB (the January data gets reported in FEB).

Macro markets get this narrative. How else would you explain High Beta and Growth Style Factors leading the charge?

  1. BETA: High Beta Stocks gained +2.0% on the week (vs. the Dow Bro “20,000” watch gain of +1.0%)
  2. GROWTH: Top 25% Sales Growers gained +2.3% last week
  3. GROWTH: Top 25% EPS Growers gained +2.3% last week

*Mean performance of Top Quartile vs. Bottom Quartile of S&P 500 Companies

Or you could have just been long one of our favorite macro exposures and saved yourself from the stress of style factoring – the Nasdaq (a great way to be long Quad2) was +2.6% on the week too.

Consider the alternative look to your portfolio (i.e. being long #GrowthSlowing):

  1. US Treasuries: 2yr yield was +2bps and the 10yr was -3bps #Riveting
  2. Utilities (XLU) were up a whopping +0.5%
  3. Volatility (front month US Equity VIX) was down -18.8%

Isn’t that just great. Oh, and I know Gold was +1.8% last week. But you know how much it was down in the prior 6 weeks to that… and you know I said short more of it last week too.

Looking at positioning in the options market (non-commercial CFTC futures & options positioning):

  1. SP500’s (Index + E-mini) net LONG position went up +78k contracts to +78,401 = +0.69x on a 1yr z-score
  2. US DOLLAR’s net LONG position was only up +1,645 contracts to +54, 295 = +1.61x on a 1yr z-score
  3. GOLD’s net LONG position only corrected -6,687 contracts to +34,560 = -1.65x on a 1yr z-score

In other words, SPY bears are finally capitulating and covering shorts a lot higher than where they could have post Trump’s win. The net long position in Gold isn’t exactly signaling a raging consensus. USD bullishness isn’t either.

That’s why, in the absence of obvious #GrowthSlowing data, I think PMs who didn’t pivot are going to be forced to do so right at the wrong time. But when in FEB-APR of 2017 will that be?

That’s where I have a wide-open mind and macro markets can get plenty creative.

Our immediate-term Global Macro Risk Ranges are now (bullish or bearish TREND in brackets):

UST 10yr Yield 2.35-2.60% (bullish)

SPX 2 (bullish)

NASDAQ 5 (bullish)

VIX 10.49-14.28 (bearish)
USD 101.50-103.75 (bullish)

Gold 1123-1187 (bearish)

Best of luck out there this week,


Keith R. McCullough
Chief Executive Officer

Open Minds - NFP YoY CoD 1 9 16