“Here we are on top of the world. We have arrived at this peak to stay there forever. There is, of course, this thing called history. But history is something unpleasant that happens to other people.”
-Arnold Toynbee
Oh how the world can and will change. If only the 2017 US Growth Bears had the timing on that right…
The aforementioned quote comes from an awesome geopolitical history, risk management, and strategy book I was reading this long weekend called Destined For War, by Harvard’s Graham Allison.
While it would have been cool to have written a book 12 months ago titled “Stocks, Destined For All-Time Highs”, popular books that make “market calls” tend to be lagging, not leading, indicators. That’s why I try to write part of my book every day.
Back to the Global Macro Grind…
Oh yeah, baby. Shake off that turkey day food coma, splash some water on your face, and let’s get after it. It’s Macro Monday!
For those of you who are new to subscribing to our Global Macro Research & Risk Management #process, Mondays give us an opportunity to contextualize the prior week’s market moves within intermediate-term @Hedgeye TREND research views.
From a FICC (Fixed Income, Currencies, Commodities) perspective, here’s how last week looked:
- US Dollar Index Down -0.9% last week breaking back down below @Hedgeye TREND support of $93.80
- EUR/USD +1.2% last week, closing right @Hedgeye TREND resistance of $1.19
- Yen (vs. USD) +0.5% last week closing right @Hedgeye TREND level $111.45
- CRB Commodities Index reflated another +1.0% last week and remains a relatively new Bullish TREND @Hedgeye
- Oil (WTI) ramped another +3.9% last week taking it back into the black at +3.4% YTD = Bullish TREND @Hedgeye
- Gold underperformed again, losing -0.7% last week = Bearish TREND @Hedgeye
- Copper inflated another +3.3% last week to an impressively bullish +26.4% YTD (Bullish TREND @Hedgeye)
- UST 2yr Yield was up another +2 basis points to +1.74% = Bullish TREND @Hedgeye
- UST 10yr Yield was flat week-over-week at 2.34% = Bullish TREND @Hedgeye
- High Yield resumed its Bullish TREND @Hedgeye (yield = bearish) with its yield dropping -7bps to -84bps YTD
So, if you were looking for a TRENDING High Yield “risk on” signal, you didn’t get it. What you got was another 2-week head-fake.
With US Durable Goods (ex-aircraft & defense) #accelerating to a 37 month high of +6.5% year-over-year growth on Wednesday, what you also got was what’s been bullish for both the Nasdaq and High Yield in 2017 = a bullish profit cycle #accelerating.
Oh, but KM, “the yield curve is flattening”…
Duh. When the 2yr US Treasury Yield goes straight up (on Oil and reflation straight back up) by > 50 basis points since SEP, the curve is going to flatten ahead of the Fed’s DEC hike. What if you shorted US growth stocks on that?
- SP500 tacked another +0.9% onto its all-time highs last week = +16.2% YTD
- Nasdaq ripped another +1.6% last week to a freshly squeezed all-time high = +28.0% YTD
- Russell 2000 led major US index gainers last week closing +1.8% at an all-time high = +11.9% YTD
If you look under-the-hood at the US Equity Sector Style part of this well-oiled machine:
A) Tech (XLK) was +1.8% on the week to a rip-roaring all-time closing high of +33.4% YTD
B) Consumer Discretionary (XLY) was +1.2% on the week to a new all-time high = +16.4% YTD
C) Utilities (XLU), like Gold, made lower-highs at only +0.1% on the week = +15.1% YTD
Then if you consider the US Growth Style Factors:
A) High Beta Stocks led the charge closing +1.3% last week to +17.4% YTD
B) Top 25% SALES Growers were up another +1.2% last week to +22.9% YTD
C) Top 25% EPS Growers rose another +0.9% last week to +18.9% YTD
*Mean performance of Top Quartile vs. Bottom Quartile, SP500 companies
So what you really see “flattening” are portfolio returns whose “overweight” positions aren’t tilted to the higher beta US growth stocks. The flattening curve crowd doesn’t want to talk about it that way.
Moreover, if their whole process is shorting stock markets with “flat curves”, they’re probably short the Japanese stock market (10s minus 2s spread is only +21 beeps), and down -18% YTD with that position. Macro tourism is an expensive distraction.
With only 1 month left to put points on the board, it’s more than ok to be winning instead of whining. We have arrived at this peak not to stay here forever, but to stay true to a disciplined process of measuring and mapping both economic data and market signals.
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)
RUT 1 (bullish)
NASDAQ 6 (bullish)
Nikkei 22066-22665 (bullish)
VIX 8.89-11.14 (bearish)
USD 92.50-94.79 (neutral)
EUR/USD 1.16-1.19 (neutral)
YEN 110.65-113.91 (neutral)
Oil (WTI) 56.29-58.98 (bullish)
Gold 1 (bearish)
Copper 3.03-3.18 (bullish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
