Beware The Bull

“Beware of over-great pleasure of being popular.”

-Margaret Fuller

If this raging bull market in US stocks is anything, it has not been popular. Surely, from a market positioning perspective, we’ll get there at some point. But neither this month nor this morning was “it.”

Being a contrarian isn’t easy. Being a contrarian for contrarian’s sake isn’t smart either. Sometimes though… if you go against the crowd like Margaret Fuller did in the early 19^th century for the right reasons… you can crush it.

Crush or be crushed. That’s what we wake up trying to do in this game, every market day. As Barron’s has their “reasons to beware the 2^nd half”, I’ll re-submit that you should beware The Bull. All of it, especially the stuff coming from Old Wall Media.

 

Back to the Global Macro Grind…

Now, to be clear, there’s always something to beware. But timing matters. At the beginning of this quarter, we told you to beware of The Bull that Old Wall was spewing about being long “reflation.” Here’s how that looked last week:

1. CRB Commodities Index (19 commodities) down another -3.1% to -12.9% YTD
2. Oil (WTI) down another -4.4% to -24.4% YTD
3. Copper up +2.2% to +4.5% YTD
4. Cocoa smoked -7.3% to -12.1% YTD
5. Rubber down another -2.2% to -32.2% YTD
6. Coffee down -2.5% to -13.5% YTD
7. Sugar down another -3.4% to -29.4% YTD
8. Orange Juice down -4.3% crashing to -29.8% YTD
9. Soybeans down -4.1% to -7.9%
10. Gold flat at +8.3% YTD

No, the cover of Barron’s didn’t say to get the hell out of all of these exposures. Instead, their cover said “Buy Europe” at the literal YTD top for European Equities. Popular, indeed.

We’ll outline our Beware Europe view when we host our Q3 2017 Global Macro Themes Call this Friday at 11AM EST. Ping if you’d like access to both that view and how we think real US growth will accelerate, at the same time.

Real US #GrowthAccelerating will be our double-down Macro Theme (vs. Short Reflation) and here’s how some of those Sector Styles did last week:

1. Tech (XLK) up another +1.9% to +16.4% YTD
2. Healthcare (led by Biotech) up a big +3.6% to +16.7% YTD
3. Energy (XLE) down another -2.9% to -14.5% YTD
4. Financials (XLF) down -1.6% to +2.8% YTD

Reflation’s Rollover has clearly pounded inflation expectations, long-term bond yields, and the relative performance of something like the Financials vs. the Nasdaq (up another +1.8% last week to +16.4% YTD, but let’s not talk about that).

With inflation rolling over, real US growth accelerates. Period.

That’s one of the major reasons why US Equity Market Volatility continues to collapse. In terms of the GDP cycle, US GDP bottomed at +1.3% year-over-year growth in Q2 of 2016, and we currently have it tracking at +2.25% year-over-year in Q217.

I’m not suggesting that with front-month VIX down another -3.5% last week, crashing to -28.6% YTD at 10.02 that this doesn’t suggest some complacency by the bulls. But I don’t see absolute capitulation by all of the bears yet either. 

One way to look at that is futures & options positioning (CFTC non-commercial positions):

1. SP500’s net LONG position came down -49,773 contracts last week to a position of only 8,535
2. The net LONG positioning in the Russell 2000 swung -23,048 contracts last week to a net SHORT position of -15,348
3. 10yr Treasury Yield’s net LONG position ramped +87,660 contracts to +372,991

In other words, Wall St. is positioned flat to net short US Equities and super long Growth and/or Inflation Slowing via a massive net LONG position in long-term Treasuries, right before US growth accelerates from +2.25% toward +2.65-2.95% over the next 3 quarters.

So, if you’re positioned alongside consensus, what should you beware?

With the aforementioned rout in commodities in the rear-view, I don’t think reflation “surprising on the downside” from here is going to surprise a consensus that has already priced it in.

I think the real surprise of 2017 will be that real growth exposures crushed it.

Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.12-2.21% (bearish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6190-6284 (bullish)
XOP 29.50-32.40 (bearish)
VIX 9.77-11.07 (bearish)
Oil (WTI) 41.81-45.09 (bearish)
Nat Gas 2.81-3.04 (bearish)
Gold 1 (bullish)
AMZN (bullish)
FB 151-157 (bullish)
GOOGL 960-990 (bullish) 

Best of luck out there this week,
KM 

Keith R. McCullough
Chief Executive Officer