Did You Sell The Bounce?

“Anything that won’t sell, I don’t want to invent.”
-Thomas Edison 

Did you sell the bounce? There was another nice selling opportunity in everything from US stocks to Chinese and European ones yesterday. There was an excellent short selling opportunity in commodities impacted by our #ChinaSlowing call (like Copper) too. 

Anything I can’t go both ways on, I don’t want to analyze. 

Ostensibly, if you’ve done all of your fundamental and quantitative research, you should be able to take advantage of an asset’s price when it goes up or down. Master the moves. Selling higher than where you bought is the name of the game. Timing matters. 

Back to the Global Macro Grind… 

Thanks to all of you who tuned into our Q2 Global Macro Themes presentation @HedgeyeTV yesterday. I spent little time on tariffs, Trump tweets, etc. and lots of time on what the Old Wall and its growing consensus is missing on growth, profits, and inflation. 

As always, your feedback and questions about our independent rate of change research process and its outputs were most welcomed. I didn’t get a ton of pushback yesterday. Most questions considered how to play our probable scenarios in different ways. 

I know. Imagine that – our clients are actually looking for MORE ways to position for what we think is becoming probable (while consensus still considers these themes and ideas improbable)! #DontBeConsensus 

Here are 3 examples of what I thought were good Institutional Investor questions: 

1. If the US is headed toward Quad 3 in Q3, why not buy Energy stocks?
2. If the US Dollar is bottoming, why not buy Japanese stocks?
3. If this is the last quarter in Quad 2 and it is peak cycle, why stay with US Consumer Discretionary? 

I don’t know about you, but I think its patronizing when a company’s exec tells me a softball of a question is a “great question, Keith.” My definition of good questions are those that are hard to answer. 

So let me take a crack at all three of the aforementioned questions: 

1. ENERGY STOCKS – the main reason why I wasn’t long US Energy Stocks (which are down around -7% YTD) in Q1 of 2018 was that I thought inflation expectations were too high and they’d roll over in the back half of the quarter (see Q118 Macro Theme: Reflation’s Rollover for details on that). But now, given that Oil (WTI) has corrected but remains a Bullish @Hedgeye TREND, getting long Energy Stocks (XLE) is on my menu of ideas. I need my quantitative signaling process to get me to hit the buy button, so stay tuned on that. I also think getting long Natural Gas and some of its related equities is interesting. Again, timing matters here as Energy stocks have been dogs so far in 2018.
2. USD vs. JAPAN – since there are very few inverse-correlations in all of big liquid Global Macro as powerful as the Yen Up (Dollar Down), Nikkei Down one, timing really matters on buying something like Japanese Equities. If the correlations hold (they aren’t perpetuities, they don’t have to), and the Yen starts signaling lower-highs vs. USD, that could be the beginning of me being less bearish on Japanese stocks. Since our GIP (Growth, Inflation, Policy) Model for Japan is signaling that inflation is peaking there, that would be an interesting combo alongside a USD that reverses to Bullish TREND vs. Yen. But I don’t have that signal yet.
3. CONSUMER DISCRETIONARY – since this is effectively the only Top US Sector Style I’ve kept in our TRADE/TREND/TAIL long/short ideas section of the Macro Themes deck, I think it was the most important one to call out. At +1.0% YTD, Consumer Discretionary (XLY) is the #1 performer out of the Top 10 US Equity Sector Exposures you could be net long or overweight, so I’m not in apology mode for staying with it. That said, this one is A) long in the tooth (that’s what happens with late cycle exposures like wage growth and consumption) and B) not where you want to be when we enter Quad 3 (that’s called stagflation, where real growth slows as inflation accelerates). If my @Hedgeye TREND signal breaks on XLY, I’m probably out. 

Essentially, moving out of Consumer Discretionary (XLY) and into Energy (XLE) would be the same call. I’m not there yet. 

Not surprisingly, I’m getting asked about it because that’s the pivot that our 4 QUADRANT asset allocation framework suggests we make going from Quad 2 to 3. I just have this other dude named Mr. Market to wait on for the signal to make my move. 

As for Long USD (down -2.5% YTD), Short Yen (up +6.2% YTD), and Long Japanese Stocks (down -5.7% YTD)… that position would have obviously just added to the mess of losses associated with not being positioned for #GlobalDivergences YTD… 

“So”… I’ll reiterate that the most important part of answering tough questions (including when to sell bounces in Global Equity exposures that we do not like right now) – timing matters! 

Again, thank you to all of you who remain well ahead of the crowd with questions like these. Your job is to beat consensus and deliver alpha, not to be a politicized and emotional Macro Tourist who is chasing high and selling lower. 

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

UST 10yr Yield 2.70-2.88% (bullish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
Biotech (IBB) 100-107 (bearish)
Energy (XLE) 65.03-68.75 (bearish)
Nikkei 205 (bearish)
VIX 17.47-26.94 (bullish)
USD 88.60-90.25 (neutral)
YEN 104.60-107.29 (bullish)
Oil (WTI) 61.87-64.68 (bullish)
Nat Gas 2.60-2.79 (bearish)
Copper 2.94-3.08 (bearish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer