“People often think and behave in hierarchies, with repetition and scaling.”
-Benoit Mandelbrot
As opposed to the whiny political headlines you continue to read this morning, I thought it would be nice to use a few non-consensus words to describe what’s been happening on the market’s scoreboard for the last 6 months: Fractal Squeeze!
Higher lows on pullbacks + higher all-time highs on ramps = a simple pattern executed simply and repeatedly (that’s what fractals are). MSM’s bitter pundits can call this recent US stock market move whatever they want. I call it bullish.
“And it’s a great day to be alive… I know the sun’s still shining when I close my eyes. There’s some hard times in the neighborhood, but why can’t every day just be this good?”
Back to the Global Macro Grind…
Yep, I just combined one of my favorite song’s lyrics (Travis Tritt’s “It’s a Great Day To Be Alive”) with the deep simplicity of it all (Mandelbrot’s math). So that’s annoying (if you’re still bearish), and a short-term top is probably in.
Having been on the wrong side of short squeezes plenty of times in my career, it feels good to have learned from my mistakes. Yesterday we finally saw some capitulation to the upside.
Why are the bears capitulating?
- For 6 months, every time they’ve shorted growth (after a down move on a political concern), they’ve lost money
- Not to be confused with one-off data points, trending US growth data continues to accelerate from 2016’s lows
- US profits are ripping, in rate of change terms
That last point is maybe too “hard” of a data point to acknowledge (especially when the aggregate year-over-year earnings for Nasdaq names that have reported their quarter are +46%), so let’s review it in broader (SP500) detail:
- 107 of the SP500 companies have reported their respective quarters
- Aggregate SALES growth is currently +4.4% year-over-year (y/y)
- Aggregate EPS growth is currently +13.2% year-over-year (y/y)
- Aggregate y/y SALES growth for the Financials and Tech is currently +8.1% and +8.2%, respectively
- Aggregate y/y EPS growth for the Financials and Tech is currently +20.7% and +27.3%, respectively
Oh, and “believe me”, I get that the Financials have “underperformed” on non-trending 50-day moving monkey scorecards, but isn’t it fascinating and totally-unsurprising that on a TRENDING basis (6 month returns):
- The Financials (XLF) are leading the league at +21.5%
- Tech (XLK) is crushing it too (albeit less so) at +13.2%
- Oh, and the Russell 2000, is +14.8% in the last 6 months too…
These trending (6 month) returns matter to me because this duration encompasses the time frame from where our data-driven model told us to get long US #GrowthAccelerating (and to get out of #GrowthSlowing Quad3 exposures).
What is the intermediate-term TREND for something that was over-owned 2-3 months ago like “reflation”?
- CRB Commodities Index was actually DOWN -0.5% yesterday and is DOWN -4.7% in the last 6 months
- Oil (WTI) was down (again) -0.7% yesterday and is DOWN -10.5% in the last 6 months
- Natural Gas was down another -1.1% yesterday and has crashed -22.0% in the last 6 months
- Energy Stocks (XLE) lagged again yesterday (XLE +0.6% vs. Nasdaq +1.2%) and is -2.2% in the last 6 months
- Wheat deflated another -0.6% yesterday and is -10.8% in the last 6 months
That’s why we call it Reflation’s Rollover (because it’s rolling over).
You know what also rolled over, hard, yesterday? US stock market volatility. Front-month US Equity Volatility (VIX) actually crashed, dropping -32% on a 1-week duration!
And remember the focus points we made on buying the Nasdaq, SP500, and Russell as their implied volatility PREMIUMS exploded to the upside on minor underlying equity market corrections? They got crushed in the last 3 trading days too:
- SP500’s implied volatility PREMIUM (vs. 30-day realized) dropped from +108% to +5%!
- Nasdaq’s implied volatility PREMIUM dropped from +103% to +21%!
- Russell 2000’s implied volatility PREMIUM dropped from +20% to -7%!
That’s right, after the genius of macro hedgie consensus slapped on the biggest net SHORT position in the Russell 2000 in 2.5 years (-70,662 net short futures & options contracts), it got fractally squeezed for a +3.9% one-week RUT ramp.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.18-2.37% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 5 (bullish)
XOP 34.01-36.63 (bearish)
VIX 9.99-13.25 (bearish)
USD 98.75-101.10 (bullish)
EUR/USD 1.06-1.09 (bearish)
Oil (WTI) 48.55-51.79 (neutral)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
