“This wasn’t that big a bump in the equity market.”
-Bill Dudley
While I highly doubt that New York Fed Head, Bill Dudley, was trying to channel his inner 1975 Jaws with Quint’s famous “you’re gonna need a bigger boat” line, for me it certainly rang a bell.
Sadly, having a Fed Head ring the bell on buying-the-damn-dip has been something we dirty market dogs have been accustomed to getting, Pavlov style, since the Great FC. We did not get that yesterday.
His comment yesterday that “my outlook hasn’t changed just because the stock market is a little bit lower” was A) a little cocky and B) absolutely subject to change. His era of central market planners always change as markets do.
Back to the Global Macro Grind…
We do need a bigger US stock and bond market correction for me to jump in these volatility infested waters and buy-the-damn-dip more aggressively. I’ve only issued 1 buy signal on 1 macro position in the last week and that’s the Nasdaq.
While I’ve been accused of being “too bullish” during Nasdaq corrections for well over a year now, I’ve also been indicted as being “too bearish on Europe” for the last 6 months. It’s a damn good thing I haven’t been buying those European stock market dips!
To reiterate the crystal clarity of it all, there are more Global Equity markets that my Macro Team and I are more bearish on here in 2018 than we are bullish. Being long something that’s actually UP in 2018 (Nasdaq) works vs. plenty of things that are down YTD.
On slide 42 of our current Macro deck (Theme = #GlobalDivergences), here are my Top 3 LONGS vs SHORTS in Global Equities:
LONGS:
- USA (Real Growth Equities, not Bond Proxies)
- India (favorite EM within an underweight EM view)
- United Kingdom (not the FTSE – UK based consumption growth)
SHORTS
- Eurozone (either broad equity Index or countries like Germany, France, and Italy)
- South Korea (KOSPI)
- China (preferably Old China, post 2016 stimulus bubble)
There are some countries where we have a #GrowthAccelerating view (we call those Quad 1 and Quad 2 setups in our GIP Model – Growth, Inflation, Policy) but a bearish quantitative @Hedgeye TREND risk management signal.
A good example of that is Japan. The Nikkei recently broke my intermediate-term TREND signal level of support as the Yen broke out to Bullish @Hedgeye TREND vs. the US Dollar. On those, I stop myself out and try to just stay away.
Put simply (and this isn’t simple – it’s taken me almost 20 years to get the combined FUNDAMENTAL and QUANTITATIVE research #process to inform my decision making like this), I need both the fundamental outlook and signal in my favor to take a position.
Breaking down the US Equity market into some of its parts, what’s recently developed is a #divergence between:
A) The Nasdaq which remains Bullish TREND @Hedgeye … and
B) The Russell 2000 which just broke to Bearish TREND @Hedgeye
Fundamentally, since our research view is that we should see a rollover in headline inflation in the coming months, this break-down signal in the Russell makes sense to me. It did when we made our Reflation Rollover call in March of 2017 too.
Why?
- The Russell 2000 is much more rate sensitive than the Nasdaq (Russell has a 26% weight in the Financials)
- The Russell 2000 is not long SIZE (large cap) like the Nasdaq is and SIZE is a Style Factor the market likes
- If Reflation Rolls over, rates should too – any series of lower-highs in rates is a Pain Trade
What is a Pain Trade?
A) Being long and/or short the same position as Consensus Macro at exhausted z-scores in futures and options positioning
B) Being on the wrong side of the boat in Spielberg’s Jaws
Yep, you get it. And my man Bill Dudley hopefully does too. If the inflation data rolls over in the coming months, his new central market planner in chief, Jerome Powell, can do a Dovish Hike in March, get bond yields to dip… and give US stocks a little rip.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.65-2.88% (bullish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 6 (bullish)
Nikkei 211 (bearish)
DAX 121 (bearish)
VIX 12.48-37.49 (bullish)
USD 88.30-90.38 (bearish)
YEN 108.07-110.50 (bullish)
Oil (WTI) 61.13-67.02 (bullish)
Gold 1 (bullish)
Copper 3.05-3.15 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
