Aspects of A Bounce

“They are two aspects of one reality.”
-Benoit Mandelbrot

Need a framework to contextualize bubbles, crashes, tops, bottoms, etc.? Oh do I have some required reading for you! Chapter 10 of The (Mis)Behavior of Markets is titled “Noah, Joseph, and Market Bubbles.” It’s a fractal beauty.

“I call these two distinct forms of wild behavior the Noah Effect and the Joseph Effect. One, the other, and usually both can be read in many financial charts. They mix together like two primary colors…

The idea is simple: The Joseph Effect depends on the precise order of the events, while the Noah Effect depends on the relative size of each event” (pg 202). That’s why many who subscribe to our #process, agree that both timing and sizing matter.

Back to the Global Macro Grind…

Welcome to Macro Monday! Today is the day where we break-down the aspects of last week’s US stock market bounce within the context of intermediate-term @Hedgeye Global Macro TRENDs.

First, from a FICC (Fixed Income, Currency, and Commodities) perspective, here’s what happened last week: 

1. US Dollar Index bounced +0.9% (after falling -1.5% in the week prior) and remains Bearish TREND @Hedgeye
2. EUR/USD corrected -0.9% on the week but remains Bullish TREND (as most FX pairs vs. USD do) @Hedgeye
3. Yen (vs. USD) was down -0.6% on the week to +5.4% YTD and remains Bullish TREND @Hedgeye
4. Pound (vs. USD) corrected -0.4% on the week to +3.4% YTD and remains Bullish TREND @Hedgeye
5. CRB Commodities Index reflated +1.2% on the week to +1.1% YTD and remains Bullish TREND @Hedgeye
6. Oil (WTI) was +3.3% last week to +5.2% YTD and remains Bullish TREND @Hedgeye
7. Copper corrected another -1.2% to -2.6% YTD and is now registering NEUTRAL TREND @Hedgeye
8. Gold dropped -1.9% (Dollar Up) on the week but remains Bullish TREND @Hedgeye
9. UST 2yr Yield gained another +5 basis points last week to 2.24% and remains Bullish TREND @Hedgeye
10. UST 10yr Yield lost 1 basis point last week to 2.87% and remains Bullish TREND @Hedgeye 

That’s right, the short-end of the curve (2s) looked like the reflation trade (Oil) did, whereas the long-end of the curve (10s) didn’t want to “breakout” as Consensus Macro continues to position for #InflationAccelerating, AFTER inflation accelerated.

Since I remain bullish on TRENDING US BOND YIELDS, but bearish on the next 2-3 months of both headline US inflation reports and #GlobalDivergences (on both growth and inflation), what the bond market signaled on the equity market bounce made sense to me.

Does it make sense to be bullish on something but to call for it to correct? Obviously that’s one big aspect of market timing. Just like short-term bottoms in bond proxies, short-term tops in longer-term bond yields matter.

Since we’re still short (or underweight) bond proxies like Utilities, Consumer Staples, and REITS, I need to make a pivot to at least neutral on these sub-sector exposures. I haven’t done that yet. Our “Best Idea” has simply been to remain long US GROWTH.

On that Sector Style scorecard, here’s what Mr. Market said last week:

1. NASDAQ led the charge up another +1.4% on the week to +6.3% YTD = Bullish TREND @Hedgeye
2. Tech Stocks (XLK) up another +1.7% on the week to +6.8% YTD = Bullish TREND @Hedgeye
3. Consumer Discretionary (XLY) stocks up +1.1% on the week to a league-leading +7.3% YTD = Bullish TREND @Hedgeye
4. Consumer Staples (XLP) down another -2.2% last week to DOWN -4.5% YTD = Bearish TREND @Hedgeye
5. Utilities (XLU) +0.5% on the week to -4.4% YTD = Bearish TREND @Hedgeye
6. REITS (MSCI Index) down another -0.6% last week to DOWN -10.0% YTD = Bearish TREND @Hedgeye 

Breaking last week’s US stock market performance down by other Style Factors, here were the top scorers:

1. HIGH BETA stocks led the way at +0.9% week-over-week to +3.7% YTD
2. Top 25% SALES Growers added another +0.7% week-over-week to +3.7% YTD 

Those weekly and YTD scores stand in sharp contrast to what we haven’t liked (slow beta defensives). HIGH YIELD as a US Equity Style Factor dropped -0.2% in a big up week for growth and is DOWN -3.7%. That’s -740 basis points of under-performance vs. Long US Sales Growth.

As bad as it has been for those not buying the damn dip in US #GrowthAccelerating exposures vs. Low Beta, Slow Growers, in parts of the European Equity market it has been worse! I’ve been writing about this divergence for going on 8 months: 

1. EuroStoxx 600 was only up +0.1% last week to -2.1% YTD and remains Bearish TREND @Hedgeye
2. FTSE was DOWN -0.7% last week to -5.8% YTD and remains Bearish TREND @Hedgeye
3. Swiss Stock Index was DOWN -0.4% last week to -4.6% YTD and remains Bearish TREND @Hedgeye 

No, I’m not cherry picking. Those are major European Equity Indices inasmuch as long a less “expensive” NASDAQ is a major US one. If I wanted to pick on something smaller, I’d tell you the Irish Stock Market was down another -1.6% last week to -4.5% YTD. 

The precise order of European Equity (and longer-term bond yield) under-performance runs in conjunction with growth and inflation slowing. There is no “breakout” in either wage or headline inflation to be concerned about in Europe.

In terms of the relative size of European growth and inflation slowing (relative to both itself and the US), we’re not signaling a crash. We’re simply reminding you why the US Growth Bull continues to win in terms of both absolute and relative returns. 

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

UST 10yr Yield 2.80-2.95% (bullish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 6 (bullish)
Biotech (IBB) 105-112 (bullish)
VIX 14.77-26.15 (bullish)
USD 88.50-90.54 (bearish)
EUR/USD 1.22-1.25 (bullish)
YEN 105.75-108.51 (bullish)
GBP/USD 1.38-1.41 (bullish)
Oil (WTI) 58.67-64.11 (bullish)
Gold 1 (bullish)
Copper 3.10-3.30 (neutral) 

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer