“The hair is real; it’s the head that’s fake.”
-Steve Allen
I’m thinking the hair might be fake… but the all-time highs are real.
What’s most interesting about Friday’s all-time closing high of 2367 for the SP500 isn’t that all-time remains a long time. No, no, no. It’s that this time the all-time high came on Up Dollar, Down Rates.
What’s been happening, of course, for 4-6 months now is Dollar Up, Rates Up, Stocks Up. That means US growth is accelerating alongside profit growth. So what's up with the Down Rates move? I think it was a head-fake.
Back to the Global Macro Grind…
With the US Dollar up for the 3rd straight week, I can only go back to 3 weeks ago to remind you that something that’s clearly in a bullish TREND can and will correct. That’s what this move in long-term rates looks like to me right here and now.
The US Dollar was up another +0.6% vs. the Euro last week ($101.09 USD Index) and here were the other notable week-over-week moves across US Equities, Commodities, and Rates (6 month TREND in brackets):
- US Equity Volatility (VIX) -0.2% on the week (down -15.6% in the last 6 months)
- SP500 +0.7% on the week (up +8.8% in the last 6 months with the USD +6.7% over the same time period)
- Nasdaq +0.1% on the week (up +12.0% in the last 6 months)
- Russell 2000 -0.4% on the week (up +12.7% in the last 6 months)
- Commodities (CRB Index) -0.6% on the week (up +2.8% in the last 6 months)
- Oil (WTI) +0.4% on the week (up +7.6% in the last 6 months)
- Copper -0.9% on the week (up +28.4% in the last 6 months)
- Gold +1.5% on the week (down -5.8% in the last 6 months)
- UST 10yr Yield -10 basis points on the week (up +75bps in the last 6 months)
Since my process defines most “head-fakes” as immediate-term TRADE moves moving counter to both fundamental and prevailing intermediate-term TRENDs, it’s easy to call last week’s Down Rates, Up Gold move what I just called it.
To be sure, by definition, all new intermediate-term Phase Transitions (going from bearish to bullish or vice versa on a TREND basis) start as “trades.” So I get that. Don’t forget that I built my multi-factor multi-duration process to consider that!
And since there are many more shorter-term performance/chart chasers out there today than there’s ever been (see Buffett’s Annual Report), I also get why my inbox fills up every time we get a counter TREND macro move.
Asking those questions when that happens is critical btw…
That’s when you either have an opportunity to:
A) Go with the TRADE and call for a new-born TREND… or
B) Fade the TRADE and reinvest in the established TREND
“Believe me”, if I thought US growth, inflation, and profits were going to slow in Q1, Q2, and Q3 of 2017, I’d have no problem going the other way, buying the old Gold Bond allocation and shorting the living daylights out of this stock market.
Instead though, this is what I did on the short-side last week:
- Shorted more long-term Treasuries (TLT)
- Shorted long-term Zero Coupon Bonds (ZROZ)
- Shorted Bond Proxies likes Utilities (XLU) and Staples (XLP)
That’s right, if you believe in #GrowthSlowing, you don’t short those 3 ideas – you buy them. That’s all we did from Q2 of 2015 to Q3 of 2016 because US GDP slowed for 5 straight quarters (200 basis point slowdown from 3.3% to 1.3% year-over-year).
Yes I was a few months late flipping the asset allocation switch in SEP-OCT where I could have been perfect. But guess what? I’m far from perfect. I tend to wait for a TREND reversal to confirm instead of always trying to call tops and bottoms.
So why would I make a call to buy #GrowthSlowing assets now? While there have been short-term trades, there’s no trending fundamental data and/or market signal to support making a decision like that.
I’m definitely not going to play Captain Valuation and call a “market top” as growth and inflation are accelerating either. As you can see in today’s Chart of the Day, this US Equity Multiple Expansion has nothing to do with the guy’s hair.
When USA ramps into Quad1 and 2 (economically), what happens is that an “expensive and overvalued” stock market becomes non-head-fake-super-yougely expensive!
Our immediate-term Global Macro Risk Ranges (TREND views in brackets) are now:
UST 10yr Yield 2.31-2.53% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 5 (bullish)
XOP 37.60-40.10 (bullish)
VIX 10.58-12.23 (bearish)
USD 100.50-101.85 (bullish)
EUR/USD 1.04-1.06 (bearish)
Oil (WTI) 53.37-54.88 (bullish)
Gold 1 (neutral)
Copper 2.65-2.81 (bullish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
