Concise Correction

“Brevity and conciseness are the parents of correction.”
-Hosea Ballou 

Wow, what a week! Need someone to preach the bull market narrative to you this morning? How about the man they called the father of “American Universalism” (Ballou)? No thanks. But I do like his quote.

I’m more into what both The ROC (rate of change data) and Mr. Market is signaling than some religion, ideology, or political party. But long-time readers of my morning rants already know that. 

This Global Equity market correction mattered inasmuch as any bounce back to Bullish TREND @Hedgeye would. No matter what the direction, there is measuring and mapping to be done this morning. Let’s get to work.

Back to the Global Macro Grind…

It doesn’t matter whether the US stock market is registering epic and consecutive all-time closing highs or seeing the biggest ROC in equity volatility (VIX +168% YTD) in half a decade. The #process on Macro Mondays doesn’t change.

On the first day of the week, we always summarize our weekend work by contextualizing week-over-week macro moves, across asset classes and Style Factors, within intermediate-term @Hedgeye TRENDs. 

Last week was a bloodbath in both US and International Equities. I’ll get to that but first want to show some of the more causal factors in FICC (Fixed Income, Currencies, and Commodities) that helped drive stocks lower: 

1. US Dollar Index had its 1^st big UP week, closing +1.3 on the week but still remains Bearish TREND @Hedgeye
2. US 10 Year Yield was up another basis point to 2.85% and remains Bullish TREND @Hedgeye
3. Crude Oil (WTI) got hammered for a -9.5% correction but remains Bullish TREND @Hedgeye

Since the US Dollar had inverse correlations of around 90% to big macro exposures (like Oil and the SP500) on the most important duration that the machines are forced to chase (30 days) price on, Dollar Up, Oil Down was big.

Commodities (i.e. Reflation Expectations) rolled over, hard, last week:

1. CRB Commodities Index was down -4.5% on the week closing just inside @Hedgeye TREND support of 191
2. Copper got tagged for another -4.8% loss, is now down -8.1% YTD and is a new Bearish TREND @Hedgeye
3. Natural Gas got smoked for a -9.2% loss, is now down -11.1% YTD and is back to Bearish TREND @Hedgeye
4. Rubber prices deflated another -4.6% last week to down -12.2% YTD = Bearish TREND @Hedgeye
5. Aluminum was down -1.5% to -3.9% YTD = Bearish TREND @Hedgeye
6. Lean Hogs dropped another -6.4% to -9.0% YTD = Bearish TREND @Hedgeye

So, if the #1 fear factor is “inflation accelerating” from here, we’re solidly in the contrarian camp; especially by the time we start seeing the FEB 2018 headline and PCE inflation data in March. 

Are shorter-term UST and longer-term European interest rates already sniffing that Reflation Rollover Part II out? 

A)     UST 2-year Yield was DOWN -7 basis points last week to 2.07% but remains Bullish TREND @Hedgeye
B)      Spain’s 10yr Yield was DOWN -2 basis points last week to 1.48% and remains Bearish TREND @Hedgeye

Back to the “it’s 1987” (for the click-bait crowd) move in US Equities last week:

1. SP500 corrected -5.2% closing just inside of its @Hedgeye Intermediate-term TREND level of support
2. Nasdaq corrected -5.1% closing just inside its @Hedgeye Intermediate-term TREND level of support
3. Russell 2000 corrected -4.5% closing below both its TREND and TAIL levels of @Hedgeye support

If and when the SP500 and Nasdaq snap both TREND and TAIL risk levels of support, I’ll let you know. Both might recapture TREND resistance (was support) this morning. Instead of being presumptuous, I’ll wait and watch on that.

Since any rollover in reflation expectation should put a short-term cap on US interest rates, I’m not buying the Russell and/or one of its heaviest weights (Financials) on dips. I’d rather buy those with rates at the low-end of my risk range.

I’m not buying European Equities on the dip either. Here’s how they did last week:

1. EuroStoxx 600 down -5.0% to -5.3% YTD = Bearish TREND @Hedgeye
2. Swiss Stocks down -5.8% to -7.5% YTD = Bearish TREND @Hedgeye
3. German Stocks down -5.3% to -6.3% YTD = Bearish TREND @Hedgeye

Yes, they were down more if you priced them in Dollars! But my job isn’t to market what certain markets do in certain currencies. It’s to help you risk manage the headline levels of market prices within our GIP model’s framework. 

In terms of market positioning, don’t forget that consensus came into this Equity and Oil correction very long of both (and short of Treasuries, across the curve). As of last Tuesday’s CFTC futures & options data:

A)     The Top 3 net LONG positions in all of macro were SPX (Index + E-mini), Oil, and Cocoa
B)      The Top 3 net SHORT positions in all of macro were UST 10yr Bonds, UST 5yr Bonds, and Sugar

I’m neither long of Cocoa nor short of Sugar. And, from a US Equity Style Factor perspective, what got hit the hardest were the Style Factors you should have stayed long for at least the last 15 months:

A)     Top 25% EPS Growers were down -5.8% on the week, under-performing the SP500
B)      Top 25% SALES Growers were down -5.7% on the week, under-performing the SP500

*mean performance of Top Quartile vs. Bottom Quartile, SP500 companies

Whether all, none, or some of these week-over-week macro market moves make sense to you isn’t the point of contextualizing The Game this way.

Less words and more numbers provide the brevity and conciseness that our sometimes qualitative minds desperately need for risk management discipline. 

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

UST 10yr Yield 2.70-2.90% (bullish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 6 (bullish)
DAX 110 (bearish)
VIX 13.38-41.31 (bullish)
USD 88.25-90.69 (bearish)
Oil (WTI) 59.14-67.01 (bullish)
Nat Gas 2.48-2.95 (bearish)
Copper 3.02-3.17 (bearish) 

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer