“So you begin by observing, carefully.”
-Benoit Mandelbrot
How about that epic 2-day correction of -1.8% in the S&P500? Heck, it was almost a full 3-day-er in US Tech Stocks. These are from the all-time closing highs of last week, no less. I certainly hope you didn’t chase those!
Buying the all-time high can be a headache for a short and/or a long time. That said, buying these damn-dips has been nothing of the sort. So we went back to work in Real-time Alerts and did some dippin’ yesterday. In bull markets, I buy during clusters of episodic volatility.
As The Brot reminds us about observing short-term market prices, “they bounce around a lot… when you analyze it, you quickly realize it does not fit the tidy pattern of a bell curve… big changes often come in rapid succession...” –The (mis)Behavior of Markets, pg 19
Back to the Global Macro Grind…
Can you handle nothingness… then changes that come in rapid succession? I certainly hope so. That’s how markets move. And that’s why we get paid the big bucks! Sometimes risk happens slowly, then all at once.
Interestingly, but not surprisingly, it was some of the highest beta speculative stocks that got pounded the hardest yesterday. I’m not talking FAANG. I’m talking pot and “block-chain” stocks, baby!
Some of the explicit Reflation Trade Sector Style exposures got hit hard too:
A) Metals & Mining ETF (XME) corrected -3.0% on the day to +2.5% YTD
B) Oil & Gas Stocks (XOP) got tagged for a 1-day drop of -3.5% to -0.6% YTD
Observe that carefully for another second. In a trending bull market for oil and related reflation expectations, one of the highest beta ways you can be long of that is DOWN for 2018 YTD and metals & mining stocks are under-performing the SP500. Why?
Is Mr. Market front-running what the reported headline inflation data should in the next 2-3 month? Is this Refla’ Ja Vu?
For those of you who don’t get my bad jokes, Refla’ Ja Vu is the movie that we’ve seen before. We called it Reflation’s Rollover from MAR-AUG of 2017. It was a risk management view that you got paid nicely via where not to be positioned for 6-7 months.
As you can see in the Chart of the Day, Reflation’s Rollover in Q2 of 2017 helped drive REAL GDP GROWTH #Accelerating in both Q2 and Q3 of 2017. Reflation re-accelerating from SEP-DEC subtracted from real GDP growth (the GDP Deflator went up) in Q4 of 2017.
So on and on we go…
Observing market corrections carefully within the context of the ever-changing fundamental growth, inflation, and profit data. What else would you study to make real-time market decisions? Listen to the State of the Union? C’mon.
On the US Profit Cycle front, here’s your real-time rate of change update on Q417 Earnings Season:
- SP500: 170 companies have reported aggregate year-over-year EPS growth of +12%
- NASDAQ: 31 companies have reported aggregate year-over-year EPS growth of +31%
- RUSSELL: 341 companies have reported aggregate year-over-year EPS growth of +20%
Since my main concern on the Profit Cycle is comparing against Q1 of 2017 and we won’t compare against those base effect concerns until April, I’m happy to be long of a US consumption and profit growth sector like Consumer Discretionary (XLY) #accelerating right now.
Consumer Discretionary (XLY) stocks only corrected -0.5% yesterday and are pretty much pounding every major Sector Style in the USA at +9.6% for 2018 YTD. If we get any sequential rollover in reflation in Q118, that pays the US consumer in real growth terms don’t forget.
What else do I still like on the long side? I’m still bullish on Tech (XLK) and Biotech (IBB). At a time/price, things like Energy Stocks (XLE) and US Initial Public Offerings (IPO) look interesting on the long side against our short ADT idea too.
For more dip-buying-opportunities, in my @Hedgeye Risk Range update (always at the end of this strategy note and more broadly in our new RISK RANGES branded product), there are plenty of things to be bullish on. One of those things is not equity volatility from last price.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.59-2.73% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
Biotech (IBB) 112-121 (bullish)
Energy Stocks (XLE) 74.57-78.96 (bullish)
DAX 13141-13500 (bullish)
VIX 9.58-15.61 (bearish)
USD 88.38-90.75 (bearish)
EUR/USD 1.22-1.25 (bullish)
Oil (WTI) 62.71-66.54 (bullish)
Nat Gas 2.96-3.40 (bullish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
