“Gentlemen, that road must be recovered before night.”
-Ulysses S. Grant
When you have your opponent breaking down defensively, attack. Don’t let up. There will be time to rest after victory. That’s now a history of success for stock market bulls in Q1 of 2017. The score doesn’t lie; people whining about “soft” data do.
The aforementioned quote came from a young General Grant where “he first achieved national attention for his victory in the strategic battle for Fort Donelson in Tennessee… he chose not to retreat or stay put but to attack.”
“In the brief space of 12 days, Grant unbolted the door to Tennessee… bringing the army together in mostly seamless cooperation. He captured fourteen thousand prisoners, the most in American history to that time.” (American Ulysses, pg 195-199)
Back to the Global Macro Grind…
I can’t recall buying every damn dip for all of Q1 since way back in 2013. Some might call that brave. Some might call that lucky. People can call it whatever they want to call it – we’ll call it a big bull vs. bear battle win.
And now, we can rest… and wait for the next pullback.
Wouldn’t it be awesome if we pull back on “soft data” decelerating in April as the hard data (like jobs growth) continues to accelerate? That could easily happen with the ISM this morning vs. the US Labor Report on Friday, btw.
Then what? Will MSM headlines be that the soft data is softening while the hard data is hardening?
Back to the Q1 score, last week was a Dollar Up, High Beta Stocks Up week:
- US Dollar Index resumed its bullish TREND (+5.1% in the last 6 months) with a +0.7% weekly gain
- Euro corrected -1.4% on the week vs. USD (it’s down -5.2% in the last 6 months = bearish TREND @Hedgeye)
- Russell 2000 (RUT) squeezed the consensus net SHORT position, closing +2.3% on the week = +10.7% in last 6 months
- Nasdaq ramped to an all-time closing high (Thursday) in the midst of a +1.4% week = +11.3% in the last 6 months
- Consumer Discretionary (XLY) was +1.6% on the week vs. slow-growth yield chasing Utilities (XLU) -1.1% wk-over-wk
From a US Equity Style Factoring perspective, this is what that looked like:
A) High Beta Stocks were +2.8% week-over-week
B) Low Beta Stocks were +0.1% week-over-week
*Mean performance of Top Quartile vs. Bottom Quartile of SP500 Companies
And, again, if you look at the intermediate-term TREND instead of the daily “soft” vs. “hard” articles from the Old Wall’s media, you’ll see that High Beta Stocks are +13.6% in the last 6 months vs. Low Beta only registering a +4.0% 6 month gain.
Where I think we’ll see some softening of the high-flying “soft data” is in commodity and “reflation” oriented diffusion indices. You know, like ISMs and PMIs… i.e. the things bears have been calling for a rollover in, for about 4-6 months.
To a large degree these manufacturing and cyclical readings are tethered to the price momentum of the CRB Index, Copper, Oil, etc. And while they’re no longer in their bombed out depression/recessions of this time last year, they’ve certainly lost their momo.
Look at last week’s commodity moves within the context of their 6 month returns:
- CRB Index (19 Commodities) was +1.3% last week but is actually down -0.2% in the last 6 months
- Oil (WTI) reflated an impressive +5.5% last week but is also down -1.1% in the last 6 months
- Gold was dead flat at 0.0% last week and has been terrible, down -5.7% in the last 6 months
I’ll review why Reflation’s Peak (our Q1 Macro Theme) should phase transition into Reflation’s Rollover here in Q2. Our Q2 Global Macro Themes presentation will be held on Thursday at 11AM EST. Ping for access to the call.
What I think is going to be most interesting on our Q2 call is the debate on how much Reflation #Slowing might or might not affect both bond yields and equity returns. There are certainly some Sector Style shifts you should make as the quads shift.
As most of you know, as reflation slows, what they call the GDP “Deflator” falls… and REAL GDP accelerates in kind. At Hedgeye we call that macro outcome “Quad 1.” That’s when inflation slows, sequentially, and real growth accelerates higher.
Hopefully we get another correction on the reflation vs. deflation concerns. Because I would love to recover a larger invested position against the bears (from lower prices) again.
Our immediate-term Global Macro Risk Ranges (intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.37-2.50% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 5 (bullish)
XOP 34.34-37.90 (bearish)
VIX 10.98-13.53 (bearish)
USD 98.75-100.80 (bullish)
EUR/USD 1.06-1.09 (bearish)
Oil (WTI) 48.02-50.90 (bearish)
Gold 1 (neutral)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
