“If this were astronomy, the argument would have ended long ago.”
-Benoit Mandelbrot
Due to popular demand, I’m bringing back The Brot this morning! With so many so “concerned” about Trump we had an astronomical correction from the all-time closing high for the Nasdaq (down -0.8%) yesterday.
Astronomical – you know, like “extremely large, huge, enormous, monumental, colossal, gigantic, massive” (Wikipedia).
I know. Scary stuff out there when you compare it to the actual growth and inflation data (which continues to accelerate). But beware of what Mandelbrot called “The Persistence of Error.” Partisan political portfolio error, that is…
Back to the Global Macro Grind…
As we enter the final day of the 1st month of 2017, January returns will remind you how profitable it was to have remained long of the growth and inflation data accelerating in High Beta US Equity terms.
On the data vs. astronomically youge political concerns, Benoit Mandelbrot massively nailed it:
“Astronomers, after checking their instruments, would not ignore the data; they would question their understanding of celestial mechanics and a new and fruitful episode in astronomy would dawn. But it does not work that way in economics, even though the equivalent of countless new planetary sightings have been recorded.” (The (mis)Behavior of Markets, pg 103)
From a top-down data perspective, we’ll start to get some of the January data this morning. The Eurozone kicked things off with an inflation accelerating report of +1.8% year-over-year CPI (consumer price index) for JAN vs. +1.1% in DEC.
In terms of the “bottom-up” data, here’s the update on USA’s Earnings Season:
- As you can see in today’s Chart of the Day, 175 of the S&P 500’s companies had reported as of last night
- Aggregate year-over-year SALES growth = +3.0%
- Aggregate year-over-year EPS growth = +4.4%
- Financials (38 of 63 have reported SALES and EPS growth of +4.1% and +8.8% respectively)
- Tech (32 of 66 have reported SALES and EPS growth of +8.1% and +9.8%, respectively)
- Energy (8 of 35 have reported SALES and EPS growth of -1.8% and -51.2%, respectively)
In other words, bottom-up EARNINGS growth continues to accelerate from its #ProfitRecession lows of 2016 (when year-over-year aggregate earnings growth went negative) and Energy earnings in particular are about to really accelerate.
You know, like really, enormously, accelerate… in rate of change terms!
That’s one of the reasons why the 1st S&P Sector exposure I signaled buy on yesterday was Energy (Oil & Gas Stocks). The XOP (Sector ETF) was -2.8% on the day and signaling immediate-term TRADE oversold within its bullish intermediate-term TREND.
Since Energy (XOP), Tech (XLK), and the Financials (XLF) are in my Top 5 sub-sector exposures to be buying on pullbacks… all I need is a youge pullback! With the SP500 +1.9% on the year, a -2.8% correction in something I’m waiting on works for me.
And if it doesn’t work for me today, what am I going to do, wax ideologically and whine politically? No. I’ll do my job and buy more.
In mainstream media, there’s certainly a lot more whining going on out there than there is winning. You can also measure and map the rate of change in consensus concern looking at the options market:
- SP500: Realized Volatility (30-day) = 6.5% and Implied Volatility = 9.4%
- Nasdaq: Realized Volatility (30-day) = 8.2% and implied Volatility = 11.3%
- Energy (XOP): Realized Volatility (30-day) = 17.2% and Implied Volatility = 24.5%
When “implied” (i.e. future expectations, in options market terms) is trading at a +24-30% premium over the volatility that’s already been realized (i.e. yesterday’s news), I tend to find buying opportunities.
If I want to be long the following macro style factors on corrections:
- Inflation Accelerating
- High Beta
- Big Implied Volatility Premiums
Then something like an Oil & Gas ETF (XOP), which currently has a +30% Implied Volatility Premium works for me. After XOP goes down -2.8% in a day, my margin of safety goes up.
So for the things I did not signal buy-more on yesterday (in Real-Time Alerts), what am I waiting for? That’s easy. I’m certainly not waiting for “valuation” or Bannon. I’m waiting on time and price within the context of expectations.
If/when the SP500 and/or Nasdaq corrects towards the low-end of my respective risk ranges (SP500 = 2267 and Nasdaq = 5536), then I may very well find another buying opportunity. It could be really astronomically youge!
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.39-2.56% (bullish)
SPX 2 (bullish)
NASDAQ 5 (bullish)
XOP 39.78-42.05 (bullish)
Nikkei 19001-19593 (bullish)
DAX 115 (bullish)
VIX 10.01-12.89 (bearish)
USD 99.73-102.19 (bullish)
EUR/USD 1.05-1.07 (bearish)
YEN 112.50-115.76 (bearish)
Oil (WTI) 51.70-53.99 (bullish)
Gold 1180-1220 (bearish)
Copper 2.55-2.74 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
