History's Highs

“History is both now and then, today and yesterday.”
-David McCullough

That’s a quote from an inspirational American speech David McCullough gave to students at The Ohio State University in 2004 that he called “The Bulwark of Freedom.” It was a beauty.

For those of you who haven’t been blinded by your political biases, 2017 has been a beautiful year to be long of US stocks too. Even the relative losers of 2017 (Bank and Energy Stocks) joined the party last week, taking the Russell 2000 back to an all-time high.

All-time, remains a long time. Both now and then, today and yesterday. And you’ll have yet another buying opportunity in our favorite 2017 US stock market index (the Nasdaq) this morning.

Back to the Global Macro Grind… 

Is there something wrong with celebrating the successes associated with free market liberties and buying opportunities? C’mon guys and gals. It’s Monday morning – let’s get after it!

While I can empathize with surly “valuation” experts who have been shorting the wrong sector (and style factors) in 2017 (Tech), we even had something exciting for them to smile about last week:

A) Utilities (XLU) were -2.8% in an up tape to +9.6% YTD
B) Consumer Staples (XLP) stocks were down -2.4% to +4.3% YTD

Looking back at the last 30 years of NTM P/E (price to earnings) ratios, those are easily the 2 most EXPENSIVE US Equity Sectors relative to where they’ve been priced historically (in the 97-99^th percentiles of historical readings vs. Tech in the 65^th percentile).

On the other side of that long/short setup, if you had this on: 

A) Financials +2.7% week-over-week to +9.4% YTD and…
B) Russell 2000 +1.3% week-over-week to +6.9% YTD 

Then you had a crusher week.

Crush or be crushed. That’s what I tell my 10 year old hockey team. And I’m happy to tell you that too this morning. Where I’m from, not everyone gets awarded a trophy. We should all strive for excellence in this good life.

What got crushed last week?

1. The Yen – down -1.0% last week vs. USD (which had its 2^nd up week in a row off the lows)
2. Gold – down -2.1% last week on the 5 basis point ramp we saw in both 2 and 10yr UST Yields
3. Volatility – front-month US Equity VIX was down another -6% last week taking its crash to -32% YTD

In other words, most of the relative and absolute crushing into month-end has been done in the arena of real US growth expectations, which the US Federal Reserve itself finally admitted being behind the curve on. 

2017 US Growth Bears will get their reminder on that with a +3.0% US GDP print on Thursday.

From a US Equity Style Factoring perspective, ‘crush or be crushed’ was alive and well again last week:

1. LEVERAGE (High Debt to EV) was down -0.4% on the week to +7.1% YTD
2. LOW QUALITY (High Short Interest) was down -0.3% on the week to +0.2% YTD
3. HIGH YIELD (as in Bond Proxy Equities) was down -1.0% on the week to -0.5% YTD
4. BOTTOM 25% SALES GROWERS were down -0.5% on the week to +1.8% YTD
5. BOTTOM 25% EPS GROWERS were down -0.5% on the week to +2.5% YTD

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

That’s right, low-quality-slow-growers-with-leverage is NOT what one should be long of when US GDP Growth is #accelerating for the 5th consecutive quarter.

In sharp contrast to those 5 aforementioned, non-alpha-generating Style Factors, here’s where the real money has been made:

1. NASDAQ = +19.4% YTD
2. TOP 25% SALES GROWERS = +17.0% YTD
3. TOP 25% EPS GROWERS = +16.0% YTD

AFTER a move like that, I guess it’s only fitting that Consensus Macro positioning still isn’t Bullish Enough on something like the Nasdaq. Looking at last week’s non-commercial CFTC futures and options positioning:

A) The Nasdaq (mini) net LONG position dropped -8,572 contracts to +39,707
B) The Nasdaq net LONG position compares with a 1yr avg net LONG position of +82,015 contracts
C) The Nasdaq net LONG position registers a z-score of -1.38x on a 1 year duration

In other words, despite the Nasdaq scoring an all-time closing high of 6461 last week (on September 19^th), the net LONG position relative to where it’s been wasn’t bubbly. No Sir. It was bearish.

And that too is the history of raging bull markets in US growth, both now and then, today and yesterday.

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

UST 10yr Yield 2.15-2.30% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
RMZ 1147-1183 (bearish)
VIX 9.40-10.99 (bearish)
YEN 109.79-112.95 (bearish)
Gold 1 (neutral)

Best of luck out there this week,
KM

Keith R. McCullough
Chief Executive Officer