Process Beating Popularity

“He burned with purpose, which was football, and he did not care about popularity.”
-Bruce Laird 

After what was nothing short of another fantastic week for the US stock market and its leading growth exposures, welcome to the week of the Super Bowl 2018. It’ll be Bill Belichick’s New England Patriots vs. Doug Pederson’s Philadelphia Eagles.

The aforementioned quote comes from The Education of a Coach, by David Halberstam. If you’ve ever watched a Belichick press conference, you know he couldn’t care less about his popularity! I personally find the man’s responses quite entertaining.

What struck Floyd Reese when he coached with Belichick “was the discipline and eagerness to learn… he just worked harder than everyone else” (pg 22). Never, ever, stop learning. This profession provides us a wonderful opportunity to do that.

 

Back to the Global Macro Grind…

What did we learn last week? Well, it’s Macro Monday! That means we can put last week’s macro market moves within the context of intermediate-term @Hedgeye TRENDs.

First, what a move we had in the FX market with the US Dollar getting slammed to new lows:

1. USD Dollar Index down another -1.7% on the week (already -3.3% YTD) = Bearish TREND @Hedgeye
2. EUR/USD up another +1.7% on the week = Bullish TREND @Hedgeye
3. Yen (vs. USD) up another +2.0% on the week = (new) Bullish TREND @Hedgeye
4. Pound (vs. USD) up another +2.1% on the week (already +4.7% YTD) = Bullish TREND @Hedgeye
5. Canadian Dollar (vs. USD) up +1.4% on the week = Bullish TREND @Hedgeye

Not every one of the aforementioned countries had equity markets that loved the FX move like US stocks have:

1. SP500 up another +2.2% on the week to fresh all-time closing highs = +7.5% YTD
2. EuroStoxx600 was down -0.1% on the week = +2.9% YTD
3. Nikkei 225 was down -0.7% on the week = +3.8% YTD
4. London’s FTSE was down -0.8% on the week = DOWN -0.3% YTD
5. Canada’s TSX was down -0.7% on the week = +0.2% YTD

So, not everyone was a winner last week. Imagine that. We call these #GlobalDivergences.

Since I did signal “exhaustion” in the US Dollar last week (that means short-term #oversold closer to 88.58 on the US Dollar Index), any bounce in USD will likely mean some of these major International Equity markets bounce too.

Back to the white-hot stuff, there was plenty of that in both US stocks and commodities last week:

1. Natural Gas led the charge reflating +10.5% on the week to +19.2% YTD = (new) Bullish TREND @Hedgeye
2. Oil ramped and reflated another +4.6% on the week to +9.5% YTD = Bullish TREND @Hedgeye
3. Nickel bounced back, big time, closing up +7.7% on the week to +7.6% YTD = Bullish TREND @Hedgeye
4. Wheat bounced too, closing +4.3% on the week to +3.3% YTD = Bearish TREND @Hedgeye
5. Healthcare Stocks (XLV) led US Equity Sectors, +3.5% on the week to +10.7% YTD = Bullish TREND @Hedgeye
6. Consumer Discretionary Stocks (XLY) continued higher, +3.2% last week to +10.4% YTD = Bullish TREND @Hedgeye

Since Consumer Discretionary (XLY) and Biotech (IBB = +10.6% YTD) are in our Top 3 Sector picks (alongside Tech, XLK, which is +8.2% YTD), I’m happy with being long unpopular “expensive” exposures that reflect US #GrowthAccelerating.

Dicing US Equities into Style Factors, we saw more of the same last week:

1. SIZE: Larger Cap Stocks were up another +2.5% to +8.5% YTD
2. YIELD: Low Yield Stocks were up another +2.3% to +9.2% YTD
3. GROWTH: Top 25% SALES Growers were up another +2.1% to +8.4% YTD
4. QUALITY: Low Debt companies were up another +2.1% to +8.5% YTD
5. BETA: High Beta Stocks were up another +2.0% to +9.4% YTD
   *Mean performance of Top Quartile vs. Bottom Quartile, SP500 Companies

Put simply, there’s no longer a debate on whether or not the US economy would #accelerate for 6 consecutive quarters. At +2.5% year-over-year growth in Q417 vs +2.3% in Q317 (see Chart of The Day), this is a reported reality that Mr. Market is still pricing in.

We’re at +2.7% for Q118 US GDP, so that will make a 7^th straight quarter of #acceleration, in year-over-year rate-of-change terms. Whether or not that is the beginning of a topping process will be up to Mr. Market’s data and signals too.

Remember that while “calling tops” might make some people short-term popular in the manic media, tops in both trending economic data and markets are processes, not “valuation” points.

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

UST 10yr Yield 2.55-2.72% (bullish)
SPX 2 (bullish)
NASDAQ 7 (bullish)
Biotech (IBB) 114-120 (bullish)
Nikkei 237 (bullish)
USD 88.58-90.99 (bearish)
EUR/USD 1.21-1.24 (bullish)
YEN 108.35-111.24 (bullish)
GBP/USD 1.37-1.42 (bullish)
Oil (WTI) 63.53-66.42 (bullish)
Nat Gas 2.98-3.47 (bullish)

Best of luck out there this week,
KM                             

Keith R. McCullough
Chief Executive Officer