“Suffering produces endurance, and endurance produces character, and character produces hope.”
-Romans 5:3-4
I’ve suffered plenty of losses in markets. I’ve made most of the mistakes one can make. I can empathize with people who are going through performance issues right now.
But, for now, I need to endure as a US growth bull…
God willing, my endurance delivers. I’m not Roman – the endurance of a data driven research and risk management process has nothing to do with hope either. It’s just a grind.
Back to the Global Macro Grind…
In what looked like it had a chance to be only the 3rd down day in the last 12, the SP500 popped back into the green by yesterday’s close, closing up +0.04%.
So, as we head into the final 3 trading days of February 2017, the SP500 has had 2 down days of -0.1%. Will we get a bigger correction today? While hope is not a risk management process, I do hope so. When I’m bullish, I love sales!
For the month to-date:
- The SP500 is +3.7%
- The Financials (XLF) are +5.6%
- Tech (XLK) is +4.9%
I still like all 3 of those exposures, long side. So if you have friends or foes who’d like to sell them to me on either “valuation” or Trump, send them my Twitter handle.
Healthcare (XLV) is having an excellent month too. It’s +5.5% (XLV) for February. Yep, instead of hating on the guy, if you bought the damn dips Trump created with his Healthcare & Defense (LMT) tweets, you’d have nailed those too.
The thing that has not done well in either February to-date and/or for the YTD for that matter is Energy. The S&P Energy ETF (XLE) is -1.7% for the month and -4.9% for 2017 to-date. If you really like to buy things on sale, buy that.
Why buy Energy?
- Oil’s price (WTI) is signaling bullish from both a TRADE and TREND perspective (TREND support = $50.45)
- Oil’s Volatility Signal (OVX) is signaling a major Phase Transition (from bullish to bearish – TREND resistance = 35)
- Oil related profit growth is going to accelerate, yougely, in Q1 Earnings Season
As you all know, we’re still finishing up the Q416 Earnings Season:
- 452 of 500 S&P500 companies have reported results
- Aggregate year-over-year SALES growth = +4.6%
- Aggregate year-over-year EPS growth = +4.9%
Interestingly (not shockingly), Energy has had a bad Earning Season:
- 31 of 35 “Energy” companies in the S&P500 have reported results
- Aggregate year-over-year SALES growth = +2.6%
- Aggregate year-over-year EPS growth = -10.1%
That’s bad on both an absolute and a relative basis, especially considering Energy’s negative double digit y/y EPS growth compared to something sexy like Tech whose y/y EPS growth for Q4 is currently +10.3%.
Next quarter, Energy Earnings will accelerate to UP double-digit to triple (not a typo) digits, on a year-over-year basis. And while I’m aware that Mr. Market may have already priced that earnings #acceleration in, I’m not betting on it.
Especially in the land of underweight vs. overweight, something like the Low-Beta, Slow Growth, Yield Chasing sector that is Consumer Staples (XLP), I think LONG Energy vs. SHORT Staples (from here) is a layup.
Now, to be clear, I’m 5’9… and can only dribble with one hand… so layups are my only option. Yes, we all have our embedded biases. And one of mine is clearly my stylistic preference to be exposed to and invested in rate of change accelerations.
One of the sharper guys I ever worked for while I was a Hedge Fund PM (Alec Litowitz, who runs Magnetar Capital) once taught me the importance of having “asymmetric setups in your portfolio.”
That’s neither Roman nor complex. That’s simply owning some things that haven’t recently worked alongside riding what’s working. Being long some losers requires a little more endurance, but they can produce some serious character when they turn.
Our immediate-term Global Macro Risk Ranges (TREND views in brackets) are now:
UST 10yr Yield 2.36-2.52% (bullish)
SPX 2 (bullish)
NASDAQ 5 (bullish)
XOP 38.29-40.80 (bullish)
VIX 10.52-12.27 (bearish)
USD 100.45-101.85 (bullish)
EUR/USD 1.04-1.06 (bearish)
Oil (WTI) 53.11-54.75 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
