Editor's Note: Below is a brief excerpt from today's Early Look written by Macro analyst Ben Ryan. Click here to learn more about the Early Look.

Trade War Angst? Hedgeye Trade War “Edge” wasn’t a catalyst for our having the Industrials Sector as a TRADE and TREND duration SHORT idea in our Q3 Macro Themes Presentation. The view was GIP-Model driven which was confirmed by the market: 

MM Relative Total Return: -392bps
YTD Relative Total Return: -718bps

The underperformance gap has widened more recently and whether it’s trade war driven, performance chasing, etc., consensus is unquestionably worried about the sector prospectively. It’s important to note that recent underperformance and worry as seen in derivatives markets fits a QUAD 4 environment which is where we’re tracking in the U.S. for the next 3 quarters.   

We observe this “worry” by viewing sector “dispersion” through then lens of implied volatility embedded in the cost of hedging downside. 

“Implied dispersion” compares put implied volatility At-the-money for a sector (XLI in this case) relative to the benchmark (SPY). The Chart of the Day shows this dynamic for the 1Mth duration (Puts that expire in one month) across S&P 500 sectors. The Industrials Sector is the clear stand-out from a “cost of hedging” standpoint. 

CHART OF THE DAY: No Thoughts on Trade Wars? - 07.11.18 EL Chart

CHART OF THE DAY: No Thoughts on Trade Wars? - early look