“The key is spotting the regularity inside the irregular, the pattern in the formless.”
-Benoit Mandelbrot
Since he’s becoming quite popular with many of you, I’m bringing back The Brot again this morning! As he taught me long ago, contrary to mainstream opinion, math is about “simplifying life, not complicating it.”
Going all the way back to ole school Greeks, Mandelbrot reminded us that “innumerable followers studied smoothness in exquisite detail. Lines, planes, spheres are the matter of Euclidean geometry, as we are all taught in grade school.”
“I love them; but they are concepts in men’s minds, not in the irregularity and complexity of nature...”
“How many natural objects around you really fit this old Greek patterns? Maybe the surface of a pond, when there is absolutely no wind or wave? Maybe the irises of your children’s eyes, if you gaze deeply into them?”
“Clouds are not spheres, mountains are not cones, coastlines are not circles, and bark is not smooth, nor does lightning travel in a straight line (The (mis)Behavior of Markets, pg 124).” Economies aren’t linear. And markets are not simple moving averages…
Back to the Global Macro Grind…
The key to spotting the regularity (SP500 up for 9 of the last 10 trading days, establishing yet another all-time closing high of 2365) inside the irregular (Trump), has been measuring that US growth, inflation, and earnings are all #accelerating.
On growth and inflation, you know our mapping process – the predictive tracking algo is governed by Bayesian principles and the rules of fractal roughness. There is no “smoothing mechanism” (moving averages) in the model. It’s rough, and tough!
On #EarningsAccelerating, we simply record the numbers (in rate of change terms) as they are reported:
- As of last night’s close, 422 of 500 S&P 500 companies had reported Q4 numbers
- Aggregate year-over-year SALES growth has accelerated to +4.6%
- Aggregate year-over-year EPS (non GAAP) growth has accelerated to +5.1%
- Financials (61 of 63 have reported) aggregate SALES and EPS growth of +4.4% and +7.9%, respectively
- Tech (59 of 66 have reported) aggregate SALES and EPS growth of +7.3% and +10.5%, respectively
As you know, being long Financials (XLF) and Tech (XLK) pays when the US economy is in Quad2 (growth and inflation accelerating, at the same time) and there’s no magic multiple that stops the stocks from going up (arresting the growth/inflation tailwind might).
If you look at the Higher Beta way to be long a major US Index (the Nasdaq), post 81 of the 101 names in the NDX reporting, Nasdaq’s aggregate year-over-year SALES and EPS growth is running +9.2% and +13.3%, respectively.
So, if you came out of the irregular event (Trump’s win) and subsequently went overweight election-skepticism relative to the probable fundamental outlook (growth, inflation, and earnings accelerating), what regular mistake did you make?
Just asking…
While there has been a regular and predictable pattern of PMs and pundits who have been missing this move for 3-4 months now to whine about “valuation” and tweets from The Tower, there’s also been a youge implied premium in being long stocks:
- The 30-day implied volatility premium on the SP500 is still +52.2%
- The 30-day implied volatility premium on the Nasdaq has ramped to +74.1%!
When the prevailing wind and waves are on my side of the trade, I am not betting on a low-beta calm pond. What’s interesting about that lower-beta exposure is that it’s the thing that implies the most complacency:
- The 30-day implied volatility premium for Consumer Staples (XLP) is 0.3%
- The 30-day implied volatility premium for Utilities (XLU) is only +4.8%
There’s always a short-selling opportunity somewhere! And since I’ve been waiting to send out sell signals on Staples (XLP) and Utilities (XLU) I was quite happy to see my regular sell signal yesterday in XLU:
- XLU tapped the top-end of my immediate-term risk range
- XLU had already been developing rate-of-change complacency in options/volatility pricing
And while hope is not a risk management process, I am certainly hoping for an immediate-term TRADE overbought signal in Consumer Staples (XLP) today/tomorrow too.
These shorts should resonate with the “valuation” community (they both registered all-time high absolute and relative sector valuations during the 5 quarter US #GrowthSlowing period of Q2 2015 to Q3 of 2016).
But I don’t start with valuation. I use it as a complimenting factor when I am short something for more important reasons (like growth slowing). Have you ever seen a hyper growth stock act like a calm pond when sales growth slows?
Nope, there’s nothing irregular about a growth stock’s regular response to sales accelerating either.
Our immediate-term Global Macro Risk Ranges (with TREND views in brackets) are now:
UST 10yr Yield 2.34-2.53% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 5 (bullish)
VIX 10.48-12.24 (bearish)
USD 100.25-101.75 (bullish)
EUR/USD 1.04-1.06 (bearish)
Nat Gas 2.51-2.95 (bearish)
Gold 1 (neutral)
Copper 2.64-2.81 (bullish)
AAPL 130.75-137.81 (bullish)
AMZN 822-860 (bullish)
FB 132-135 (bullish)
GOOGL 830-853 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
