The S&P 500, Nasdaq and Russell 2000 hit all-time highs today.
A quick look at last week's market internals and Wall Street consensus positioning reveals what's happening beneath the surface of financial markets. Here are three critical insights.
1. Counter Trend Bounces
It was a big week for High Beta and #Growth (on the week, High beta was up +1.6% versus -0.3% for Low beta; the Top 25% of EPS growth companies were up +2.2% versus -0.3% for the Bottom 25% of EPS growth companies) as Style Factors as Low Beta and Bond Proxies corrected week-over-week. (Utilities (XLU) corrected -1.5% last week to +2.0% YTD; Consumer Staples (XLP) corrected -1.7% last week to -5.0% YTD.)
2. U.S. Dollar: Consensus Positioning
We saw a big counter-TREND weekly move post consensus positioning having been forced to chase #StrongDollar in early August. Wall Street consensus is now net long U.S. dollars by 34,215 contracts or a 1-year Z-score of 2.77X (see table below).
Last week Gold, Copper, Emerging Markets were all up with the U.S. Dollar down a full 1% on the week toward the low-end of the @Hedgeye Risk Range.
3. Yield Curve Hits 2018 Lows
As the long-end of the curve continues to make a series of lower-highs vs. #PeakCycle US inflation expectations (back in May-June), the curve continues to flatten – at +19bps, the 10s/2s spread hit a 2018 low and we expect it to continue to flatten from here.
Another catalyst for further yield spread compression is our expectation of a headline GDP miss in October. And the Fed should react to all of it on a 3-6 month lag. (Some of the crowded short positions in 10-year and 30-year contracts were forced out week-over-week... longer on the margin – see the table below. This is still one of the biggest trends to watch regarding rate bets.)