Dying Record Highs

“When I die, just keep playing the records.”
-Jimi Hendrix

Jimi Hendrix was born in Seattle in 1942 and died in London at the young age of 27. For a short period of his life he was actually a paratrooper in the US Army until he was honorably discharged in 1962. Wow did he accomplish a ton before his death in 1970.

While I may sound like a broken record at this point, the US stock market keeps seeing its record all-time highs die for new ones. Friday’s all-time closing highs for the Nasdaq and SP500 = timestamped 2017 YTD gains of +23.1% and +15.0%, respectively.

The Japanese stocks market registered a record-high 15^th consecutive gain overnight. With Dollar Up, Yen Down delivering an epic run for the Nikkei, when will this un-precendented ramp end? Rather than calling tops, we’re happy to let Mr. Market decide.

 

Back to the Global Macro Grind… 

It’s Macro Monday where we contextualize Mr. Market’s weekly message within @Hedgeye intermediate-term TREND to long-term TAIL durations. Waking up to economic and market “news” any other way would make us Macro Tourists.

Last week’s US Dollar gain of +0.7% was its 5^th weekly gain in the last 6 and it had plenty of correlating Global Macro impact, across asset classes and sub-sector exposures, as a result:

1. Japanese Yen down another -1.4% on the week and remains Bearish TREND @Hedgeye (vs. USD)
2. Euro Down -0.4% vs. USD and remains neutral TREND currently within our quantitive signaling #process  
3. British Pound down -0.7% vs. USD after tapping the top-end of the @Hedgeye Risk Range the week prior
4. CRB Commodities Index down -0.4% week-over-week to -4.4% YTD and has moved to neutral TREND
5. Oil (WTI) up another +0.4% on the week and remains a relatively new Bullish TREND @Hedgeye
6. Gold Down another -1.7% week-over-week and is still Bearish TREND @Hedgeye on #RatesRising

What’s most interesting in the Reflation vs. Deflation debate is the emergence of:

A) New Bearish TRENDs born out of the Fed pivoting back to hawkish = #RatesRising
B) Ongoing Bearish TRENDs @Hedgeye that never found a bid back to bullish like Oil did

Examples of A) are precious metals like Gold and Silver (Silver dropped another -2.8% last week and remains a relatively new Bearish TREND @Hedgeye). Whereas examples of B) are largely in the food/ag sub-sectors of the Commodities asset class:

1. Sugar prices continued to crash last week, down another -2.8% to -24.7% YTD
2. Wheat dropped another -3.1% week-over-week to -8.4% YTD and remains Bearish TREND @Hedgeye
3. Corn fell another -2.3% week-over-week to -9.3% YTD and also remains Bearish TREND @Hedgeye

Fortunately, the Fed’s behavior remains proactively predictable. Provided that we continue to see +3% headline handles on GDP (Q3’s preliminary print comes out on Friday) and #Accelerating Wage Inflation, they’re going to do what they always do – hike, late.

The bond market gets this:

A) UST 2yr Yield ripped another +8 basis points last week to a new cycle high of +1.58%
B) UST 10yr Yield ramped back to the top-end of the @Hedgeye Risk Range (+11bps on the week) to 2.38%

And so did the US Equity sub-sector exposures that correlate with #RatesRising:

1. Financials (XLF) were +2.0% on the week to +14.6% YTD = Bullish TREND @Hedgeye
2. REITS (MSCI) were down another -1.2% on the week to +1.2% YTD = Neutral TREND @Hedgeye
3. Consumer Staples (XLP) were -1.2% on thw week to only +4.2% YTD = Bearish TREND @Hedgeye

From a US Equity Style Factor perspective, last week was very squeezy too:

A) High Short Interest Stocks were +1.2% on the week to +3.4% YTD
B) High Beta Stocks were +1.2% on the week to +16.9% YTD

That’s another way to look at #RatesRising. Low Beta sector exposures like Consumer Staples get pounded by higher beta Financials when rates rise at an accelerating rate.

Is this all as good as it gets for what we call Quad 2? Since that’s when the rates of change in both growth and inflation are #accelerating, at the same time, we’ll remain data dependent in answering that question.

In the meantime, Mr. Market just keeps on playing record highs.

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

UST 10yr Yield 2.30-2.41% (bullish)
SPX 2 (bullish)
NASDAQ 6 (bullish)
RMZ 1158-1178 (neutral)
Nikkei 21196-21740 (bullish)
VIX 9.51-10.62 (bearish)
USD 92.70-94.01 (neutral)
EUR/USD 1.16-1.18 (neutral)
YEN 111.51-113.80 (bearish)
GBP/USD 1.30-1.33 (bullish)
Oil (WTI) 50.55-52.76 (bullish)
Gold 1 (bearish) 

Best of luck out there this week,
KM 

Keith R. McCullough
Chief Executive Officer