“I like the white stripes and I like the kinda twang American thing right now.”
-Ann Wilson
At one point in the 1980s I think I was in love with Ann Wilson (lead singer of a hard rock band called Heart). So no offense taking the other side of her views this morning… but I’m just back from Jamaica… and I like the Red Stripes and some Reggae, mon!
Many thanks to my teammates for giving me some time away from the screens. That kind of time with my wife and kids is absolutely priceless and much appreciated.
I’m back in the saddle and it looks like there’s a lot to do out there in macro markets this morning. So let’s get after it and buy ourselves some more exposure to some red, white, and blue US #GrowthAccelerating!
Back to the Global Macro Grind…
Not to be confused with the illusion of US growth (i.e. Reflation), I want you to be long the real stuff. We call it Quad1. That’s when inflation is slowing, sequentially, and real growth is accelerating.
Since the most bearish Q2 Macro Theme I presented before going on vaca was titled Reflation’s Rollover, I’m not at all surprised to look back on last week’s “news” that Consumer Prices (CPI) slowed from 2.74% year-over-year in FEB to 2.38% in MAR.
I wasn’t surprised to see Metals & Mining Stocks (XME) and/or Copper (down another -2.9% last week) deflate to fresh YTD lows either. I was surprised to see consensus read that as bearish for real US consumption growth (and bond yields), however.
I guess I underestimated how many people were long the Financials (XLF) on a perpetual expectation of inflation accelerating too. That view isn’t ours. As the reflation deflates, this thing called the GDP Deflator falls, and real GDP accelerates.
If we’re right on real GDP accelerating in Q2, Q3, and Q4 of 2017, I guess it will just take some time to manifest into consensus market expectations. I’m cool with that. It’ll let me buy the damn dips again, mon.
Looking at last week’s worst performing US Equity Style Factors within the context of the intermediate-term TREND:
- High Beta Stocks corrected -2.4% (and are now +13.3% in the last 6 months)
- Top 25% Sales Growth Stocks corrected -1.6% (and are now +10.6% in the last 6 months)
- Top 25% EPS Growth Stocks corrected -1.7% (and are now +10.9% in the last 6 months)
*Mean performance of Top Quintile vs. Bottom Quintile, SP500 Companies
I know. From a super short-term perspective (whether they admit it or not, lots of institutional “investors” are hostage to that duration), it can “feel” like the sky is falling every time we get a correction in High Beta Growth Stocks…
But, seriously, mon… the Nasdaq (which I’d buy more of this morning) has corrected -1.8% from its all-time high.
To be clear, something like the Russell 2000, which was down -1.4% last week, has corrected -4.6% from its all-time high in late FEB of this year. So maybe that’s the beginning of the end of some 50-day moving monkey strategy…
But for legitimate “long-term investors” who can take a week to breathe, what’s up with these trending 6 month returns?
- Nasdaq = +11.3%
- Russell = +11.0%
- SP500 = +9.2%
That’s right, 4 months ago the “technicians” were telling you that the Nasdaq was “breaking down” and the Financials and the Russell were “breaking out.” This morning, they’ll tell you the opposite. So what are you to believe?
If you look at the Financials (XLF) on a 6 month basis, they’re +17.9%. If you look at them on a 1-week basis, they corrected another -2.6% last week, leading US Equity Sector Style losers.
There’s this thing in macro that we call mean reversion. It happens, mon.
That’s why I continue to build and evolve my multi-factor, multi-duration risk management process. If I get caught doing one duration (like 1 week, 1 month, YTD, etc.), multi-duration will eventually do me.
After last week’s -8 and -14 basis point corrections in 2 and 10 year US Treasury Yields, let’s look at what the bond market is signaling on my TRADE and TREND durations:
- 2yr Yields = bearish TRADE; bullish TREND
- 10yr Yields = bearish TRADE; bullish TREND
What that means, specifically, is that the US 10yr Yield broke its immediate-term TRADE momentum line of 2.37% support but remains above its intermediate-term TREND support line of 2.06%.
That move in bond yields looks identical to both consensus forecasts on US GDP growth (which were already below ours and are now falling further) and the Financials (XLF has TRADE resistance at $23.53 and TREND support down at $21.28).
So what is it? TRADE or TREND? White flag surrender time for non-reflation-trade bulls? Or long real red US growth accelerating stripes on corrections? Don’t worry, mon. I’m completely sober this morning and will be using the process to keep you posted.
Our immediate-term Global Macro Risk Ranges (intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.21-2.41% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 5 (bullish)
Nikkei 184 (bearish)
DAX 12004-12381 (bullish)
VIX 10.91-16.38 (neutral)
USD 100.05-101.25 (bullish)
EUR/USD 1.05-1.07 (bearish)
YEN 108.02-111.99 (bullish)
Oil (WTI) 49.99-54.30 (bullish)
Gold 1 (bullish)
Copper 2.52-2.63 (bearish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
