The Car of History

“Begin thou, unforgetting Clio, for all the ages are in thy keeping, and all the storied annals of the past.”
-Statius

Have you ever been to National Statuary Hall? It’s cool. It has the statues of some of American History’s heroes. It’s also where the House of Representatives met from 1.

Clio sits above Simon Willard’s clock in Statuary Hall. As David McCullough explains, “She is there still over the north doorway. She is riding the winged Car of History, as it is called, keeping note in her book.” 

“The idea was that those who sat below would take inspiration from her. They would be reminded that they, too, were part of history… that their words and actions would face the judgment of history.” (The American Spirit, pg 13)

Back to the Global Macro Grind… 

I like to think about my profession that way. Every market day, I take notes. I write down truthful market prices. And I remind myself that a little bit of a very long and humbling history is in every market day. 

While the immediate-term can be emotional for many, the goal of the game is to beat the competition over the intermediate to long term. The only way to do that is to take advantage of immediate-term price gaps.

Market prices can go up … and they can go down. Timestamps and objective closing market prices don’t lie; mainstream media does. And our goal remains to be as close to history’s truth as possible.

In context, here’s what last week looked like in the 4 major US Equity Indices:

1. SP500 closed down -1.4% on the week to +9.0% YTD
2. Nasdaq closed down -1.5% on the week to +16.2% YTD
3. Russell 2000 closed down -2.7% on the week to +1.3% YTD
4. The Dow closed down -1.1% to +10.6% YTD

That was the 1^st down week in the last 7 for the SP500, taking it only -1.6% from its all-time closing high of 2480 (which was established last week as well btw, where it signaled immediate-term TRADE overbought @Hedgeye).

I’ve been more focused on being long the “Quad 1 US Equity Growth Exposures” of the US stock market in 2017 (Tech, Biotech, Consumer Discretionary, Housing) than the SP500 itself, but I did signal BUY SPY on Friday in Real-time Alerts.

I have not been The Bull on the Russell 2000 in 2017 and the reasoning for that is quite simply Reflation’s Rollover. With #InflationSlowing, long-term bonds yields have been falling. When that happens, the Financials under-perform.

Here’s how long-term rates and the Financials did last week:

1. UST 10yr Yield dropped another -7 basis points last week to 2.19%
2. Financials (XLF) under-performed again, closing down -2.6% on the week at +6.4% YTD

*The heaviest weight in the Russell 2000 is the Financials at 26.4%

That’s not to say what I have been saying for the last few weeks doesn’t still hold (i.e. that as Reflation’s Rollover gets priced into Dovish Fed Expectations and we move towards Q317 end, where we should get another Real Growth Surprise in US GDP): 

1. FINANCIALS: I’d buy US bank stocks when both they and the UST 10yr Yield are at the LOW-END of the @Hedgeye Risk Range
2. INDUSTRIALS: I’d keep selling “global and commodity” oriented Industrials at the HIGH-END of the @Hedgeye Risk Range as both Chinese and European cyclical data slows 

That’s another reason why I think “low-quality” and “value” continued to under-perform during last week’s sell-off. A lot of “value” trades with Energy and the Financials (neither like falling commodity prices and long-term bond yields):

1. CRB Commodities Index was -0.6% last week to -6.7% YTD
2. Oil (WTI) was down -1.6% last week to -14.4% YTD
3. Energy Stocks (XLE) were down another -2.6% last week to -15.1% YTD

By “low-quality”, I mean HIGH DEBT + HIGH SHORT INTEREST as Style Factors in US Equities:

1. High Debt (EV/EBITDA) was down -1.9% last week to +5.1% YTD
2. High Short Interest was down -2.5%  last week to -3.1% YTD

*Mean performance of Top Quartile vs. Bottom Quartile of SP500 Companies

Both of those Style Factors have been a terrible place to be exposed during the Real US #GrowthAccelerating phase of 2017 relative to something like Tech (XLK), which was only -0.9% last week to +18.1% YTD.

Long European Stocks on a “relative value” basis to US Growth was terrible again last week too:

1. EuroStoxx600 was down another -2.7% last week to +3.0% YTD
2. Germany’s DAX was down another -2.3% last week to +4.6% YTD
3. France’s CAC40 was down another -2.7% last week to +4.1% YTD

While High Quality US Growth may have corrected last week, it’s been a far better place to be in 2017 than American and/or European value trap theories.

If I’m going to look for “value”, it will definitely be in US Bank Stocks. But A) they need to be where I like to buy things (on sale) and B) hopefully that’s when the Car of History’s notebook looks a lot different that politicized emotion.

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

UST 10yr Yield 2.18-2.27% (bearish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6194-6425 (bullish)
XOP 29.68-31.52 (bearish)
DAX 192 (bearish)
VIX 9.36-16.33 (bearish)
USD 92.50-94.03 (neutral)
Oil (WTI) 47.75-49.98 (bearish)

Best of luck out there today,
KM

Keith R. McCullough
Chief Executive Officer