“New beginnings are often disguised as painful endings.”
-Lao Tzu
After big, short-term, moves, Mr. Market usually gives you an opportunity to reset your positioning. As long as you didn’t freak out and sell last week’s lows, now you have an opportunity to re-evaluate your, top-down, macro market exposures.
Can the emergence of a cluster of short-term market volatility be the beginning of a painful end in that market price? Sure. But there’s Zero Edge in calling every correction the next “1987”, since 2009.
With so many Macro Tourists getting whipped around by headlines these days, I think we have a wonderful opportunity to both contextualize macro market moves within longer-term cycles and capitalize on them.
Back to the Global Macro Grind…
The bond market looked at yesterday’s touristy “inflation is back” news and took the other side of the consensus trade. Bond yields stopped going up, the Dollar went down, and the NASDAQ ripped back up to within 3.3% of its all-time closing high.
We call this a Quad 1 (coming from Quad 2) asset allocation move where:
A) Bond Yields correct from their Quad 2 (when growth and inflation are accelerating at the same time) highs
B) Both Bonds and Bond Proxies (Utilities +2.2% on the day) bounce… and
C) Real Growth asset allocations (Consumer Discretionary, Tech, etc.) continue to ramp higher
Since the difference between Quad 1 and Quad 2 is easy to understand, let me explain it simply by saying that it’s when inflation (and its expectations) slows, sequentially, and the rate of real growth accelerates in kind.
While Utilities (XLU) were +2.2% yesterday, don’t forget they are still down -5.7% YTD whereas the Top 2 US Sector Styles we like have the following 2018 YTD returns (fully loaded after absorbing an epic short-term US stock market correction):
- Consumer Discretionary Stocks (XLY) = +6.7% YTD
- US Tech Stocks (XLK) = +5.2% YTD
Those Real Growth US Equity returns stand in sharp contrast to stock market returns where we have both GROWTH and INFLATION #slowing sequentially, at the same time, like:
- Euro Stoxx 50 is DOWN -3.3% YTD
- Germany’s DAX is DOWN -4.4% YTD
- Swiss Market Index is DOWN -5.0% YTD
I know, not every money manager wants to talk about European #GrowthSlowing and #InflationSlowing at the same time. But that certainly doesn’t mean that both the slowing data and correlated equity and bond market returns cease to exist!
So, especially if you want to maintain your Quad 1 (real growth) asset allocations in the USA, you can hedge the Global Equity Beta piece by shorting some European Stock markets when they tap the top-end of their respective @Hedgeye Risk Ranges.
Unlike in the US where the entire edifice of Old Wall Media and macro market positioning is concerned about a “breakout in inflation”, there is no data to support a view of a breakout in something like European Wage Inflation, fyi.
Another way to think about a reset in your US Equity Exposure is to isolate the rate-sensitive component:
A) Selling Financials (KRE) and/or the Russell 2000 (IWM) on rips
B) Buying REITS (VNQ) and/or covering Consumer Staples (XLP) shorts on dips
I’d also reset my gross long exposures to Real US Growth by:
A) Selling at the top-end of the @Hedgeye Risk Range … and
B) Buying what you sold back at the low-end of the @Hedgeye Risk Range
On that front, I have US Equity Market Volatility (VIX) signaling higher-lows and the SP500 and NASDAQ signaling lower-highs (vs. their all-time highs) for the 1st time in 15 months. You should be resetting your gross and net long exposures on that factor alone.
The biggest reset of all resets (across all asset classes) should be during US Dollar Up moves. Most asset classes have TRENDING inverse correlations to USD that matter, big time, to the machines right now. So be on real-time watch for that.
All the while, always remember that resets don’t have to end in crashes and recessions. The pundits I see permanently trying to call for those are either selling books or trying to generate ad-revenues with click-bait.
We’re one of the few Independent Research firms that was founded on using our #process to call the biggest reset in modern market history. We built Hedgeye’s credibility by making a call on US #GrowthSlowing in 2008.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.73-2.93% (bullish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 6 (bullish)
Biotech (IBB) 104-112 (bullish)
Nikkei 202 (bearish)
DAX 12000-12782 (bearish)
VIX 14.22-38.75 (bullish)
USD 88.38-90.75 (bearish)
EUR/USD 1.22-1.25 (bullish)
YEN 106.01-108.92 (bullish)
GBP/USD 1.38-1.42 (bullish)
Oil (WTI) 57.80-64.50 (bullish)
Nat Gas 2.46-2.81 (bearish)
Gold 1 (bullish)
Copper 3.02-3.29 (bullish)
AAPL 150.47-173.25 (bearish)
AMZN 1 (bullish)
FB 169-186 (neutral)
GOOGL 1009-1110 (neutral)
NFLX 249-281 (bullish)
TSLA 304-340 (bearish)
Bitcoin 6801-10,196 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
