“These are times in which a genius would wish to live.”
-Abigail Adams

That was the opening line of a letter Abigail Adams wrote to her 11 year old son (who eventually became the 6th President of the United States), John Quincy Adams, about living his life with a sense of purpose and urgency. She went on to add that:

“It is not in the still calm of life or the repose of a pacific station that great characters are formed. The habits of a vigorous mind are formed in contending with difficulties. Great necessities call out great virtues.” (The American Spirit, pg 117)

My thoughts and prayers go out to the victims and families affected by the horrible shooting in Las Vagas last night.

The Genius of Markets - americanspirit 

Back to the Global Macro Grind…

The genius of Mr. Macro Market is unrivaled. Not only has he absolutely nailed US #GrowthAccelerating in 2017, but he’s perfectly navigated Reflation’s Peak to Reflation’s Rollover to Reflation’s Reflation!

He was also well ahead of European strategists in predicting that something not-so-bullish was going on in Spain. Post Catalonia’s controversial vote for independence yesterday, Spain’s stock market is down another -1.2% this morning and is -8.0% since May.

Here were Mr. Market’s votes, timestamped in US equity weekly return terms, from last week:

  1. Nasdaq +1.1% on the week to a fresh all-time closing high of 6495 = +20.7% YTD
  2. SP500 +0.7% on the week to a fresh all-time closing high of 2519 = +12.5% YTD
  3. Russell 2000 +2.8% on the week to a fresh all-time closing high of 1490 = +9.9% YTD

That’s a lot of freshness. Reflation can be #refreshing, for both FX and Rates, indeed:

  1. Oil (WTI) rallied another +2.0% last week back to Bullish TREND @Hedgeye
  2. US Dollar Index was up +1.0% last week, taking it higher for the 3rd week in a row
  3. UST 10yr Yield ramped another +8 basis points last week to +2.33% = Bullish TREND @Hedgeye too

Another measure of Reflation’s Reflation is the US 5-year 5-year-forward Break-even Rate bouncing back to +1.95%. Given the move in Oil, that’s pretty close to where headline US inflation (CPI) should be reported for the month of September.

And, yes, Mr. Market nailed that too. He has The Fed’s recent pivot back to #Hawkish baking in a December rate hike.

From a US Equity Sector Style perspective, the best way to be positioned last week was long either GROWTH or REFLATION:

  1. Energy Stocks (XLE) led sector gainers, closing +1.9% on the week to -9.1% YTD
  2. Financials (XLF) were right behind Energy at +1.7% on the week to +9.9% YTD
  3. Tech (XLK) was up another +1.0% on the week to a fresh all-time high of +22.2% YTD

That’s right, being long Tech didn’t get “hurt” because the Financials did what they should do when rates rise. If you bought the damn dip in the Tech ETF earlier in the week, you simply crushed it.

What’s been getting crushed as of late (in SEP and into Q317 end in particular) are the macro and sector exposures that were super-expensive (relative to Tech) and over-owned. They are otherwise known as Lower-For-Longer Bond Proxies:

  1. Utilties (XLU) were DOWN -0.3% on the week to +9.2% YTD
  2. Consumer Staples (XLP) only +0.1% on the week to +4.4% YTD
  3. REITS (MSCI) +0.4% last week to only +0.6% YTD
  4. Gold was down another -1.0% last week to +10.2% YTD
  5. Silver was down another -1.8% last week to +2.8% YTD
  6. Platinum was down another -2.2% last week to 0.0% YTD

Yep. That’s what happens when Real Rates Are Rising. Both the absolute and relative returns of their inverse fall. And, given all the wanna-be-genius-bubble-and-top-callers out there, you’d think they’d at least be short 1 (or all) of those 6 things just listed.

From a US Equity Style Factor standpoint, last week didn’t get the “Low Beta” crowd paid either:

A) LOW BETA was only +0.2% on the week, dropping -1.0% in SEP, to +9.5% YTD
B) HIGH BETA ripped +1.9% on the week, ramping +5.8% in SEP, to +12.3% YTD

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

Nope. The crowd had to chase where the returns went into month and quarter end. There’s nothing that’s “right” or “wrong” about that. It simply is what it is. Non-linearity and “surprise” factors are the the genius of markets.

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

UST 10yr Yield 2.23-2.36% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
VIX 9.29-10.96 (bearish)
USD 91.50-93.66 (neutral)
EUR/USD 1.16-1.19 (neutral)
Oil (WTI) 49.82-52.90 (bullish)
Gold 1 (bearish)

Best of luck out there this week,
KM

Keith R. McCullough
Chief Executive Officer

The Genius of Markets - 10.02.17 EL Chart