“Success is how high you bounce when you hit bottom.”
-George Patton

Great quote, especially for those who shorted the lows of the US Equity Futures (50 handles lower) on the Gary Cohn “market news.” I’m trying to inspire those people this morning!

Process trumps politics. 

But you already know that. So let’s get after it again this morning and measure and map where macro markets are relative to where both the economic data and price, volume, volatility signals have been. 

Bouncing To Lower-Highs - 03.07.2018 macro tourist cartoon

Back to the Global Macro Grind…

As I’ve been lamenting about for the last few days, what concerns me most about Global Macro markets today aren’t my shorts – it’s what to do with my favorite longs as they signal lower-highs… 

By mathematical definition, the beginning of a topping process is established by a series of lower-highs. Therefore, when I am long of something that is not only making lower-highs but signaling future lower-highs, I start making sales.

Might I be early? Certainly. But, last I checked: 

A) No one ever went broke by booking gains … and
B) There are no rules against buying what I sell back at a lower price 

So let’s consider this mental mind bender within the context of what have been our 3 favorite S&P Sectors on the long side: 

  1. US Consumer Discretionary (XLY) = +5.7% YTD
  2. US Tech (XLK) = +7.7% YTD
  3. US Biotech (IBB) = +4.7% YTD 

All 3 of those sector exposures are signaling lower-highs on my immediate-term @Hedgeye TRADE duration but remain bullish on my intermediate-term @Hedgeye TREND duration

Sure, the returns associated with where your sector over-weights and under-weights should look fantabulous YTD. But nothing like this lasts forever. What is “this” btw? Take a look our favorite Sector Style shorts: 

  1. US Utilities (XLU) = -7.2% YTD
  2. US Consumer Staples (XLP) = -5.5% YTD
  3. US REITS (VNQ) = -9.6% YTD 

Put simply, if all you have in your 401k is an “asset allocation” to a generalist US Equity Fund manager who has those as his or her Top 3 vs. Bottom 3 over-weights and under-weights, you are very happy. Your portfolio return doesn’t care about Gary Cohn. 

Better yet, if you are exposed to a hedge fund manager who is long and short the right sectors all at the same time, you are absolutely crushing it YTD with the performance spread between Tech and Utilities alone running at +1490 basis points YTD! 

Enough about performance. Who wants to talk about that when they can come into the office and whine about whatever it is people whine about in Washington? Actually, people with poor performance do. 

Our job isn’t to play partisan pundit so that politics permeate your portfolio. So let’s keep doing our job which includes: 

  1. Being in the right Equity markets, GLOBALLY (i.e. not European ones or EM Asia)
  2. Then picking the right SECTORS
  3. Then risk managing our gross exposure to those sectors using the @Hedgeye Risk Range 

That last part of the job can drive you squirrely if you think about it (most humans naturally don’t want to sell when something is going up and to buy when something is going down), so don’t think about it. Let your computing capacity execute against your emotions. 

This brings me to what to do with our shorts…

I think tomorrow could very well present a fantastic short-covering opportunity in Utes, Staples, and REITS. Why? 

  1. Tomorrow we’ll get what could easily be another “hawkish” US Jobs report
  2. If WAGE GROWTH comes in hot, there’s no reason why the UST 10yr Yield can’t go back to the top-end of the range
  3. At the top-end of the @Hedgeye Risk Range in Bond Yields, you cover Bond Proxy (XLU, XLP, VNQ) shorts 

If the jobs report isn’t Hawkish Enough, your next catalyst is a US Reflation Rollover report next week. On March 13th, there’s a high probability in our predictive tracking algo forecast that headline US inflation (CPI) comes in below 2% year-over-year. 

So whether the jobs “news” is hawkish or dovish, I’d be booking gains on the short side of sectors we have not liked. Oh, and by the way, both Utes and REITS in particular just started signaling higher-lows in the last few days too.

Across asset classes and sub-sector exposures, Mr. Market’s signals are all starting to sing the same tune. It’s one that stands in stark contrast to what is becoming an obvious Consensus Macro positioning for rising inflation expectations.

UST 10yr Yield 2.82-2.93% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7180-7464 (bullish)
Biotech (IBB) 107-113 (bullish)
DAX 118 (bearish)
VIX 15.11-22.32 (bullish)
USD 89.20-90.75 (neutral)
EUR/USD 1.21-1.24 (neutral)
Oil (WTI) 60.15-62.49 (bullish)
Copper 3.05-3.19 (bearish) 

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer

Bouncing To Lower-Highs - 03.08.18 EL Chart