Can You Believe In Bounces?

“I can’t believe I pulled this off.”
-Tiger Woods 

Unlike a significant percentage of what you’re told with the political preface “believe me”, you can believe what Tiger Woods couldn’t believe yesterday. After winning his 1^st PGA event in over 5 years, I think that was Humble Tiger though. The man believes in himself.

Can you believe that, despite mostly every other stock market in the world not doing the same, the SP500 closed at yet another all-time closing high last week? Can you believe that Q3 of 2018 is the 9^th straight quarter of year-over-year US GDP #accelerating? 

Can you believe that the SP500 did that with Tech Stocks (XLK) down -0.4% on the week? Both the NASDAQ (-0.3%) and Russell 2000 (-0.6%) closed down on the week too.

Back to the Global Macro Grind…

Welcome to the last Macro Monday of both the month of September and Q3. Maybe some of the SP500 squeeze action has to do with quarter-end. But most of it had to do with Q2 Earnings Season #accelerating + Quad 2 intra-quarter macro data.

For those of you who are new to our #process (thanks for subscribing), on the 1^st day of the week we contextualize the weekly moves across Global Macro markets within the context of our multi-duration TRADE, TREND, and TAIL quantitative signals.

Let’s start with one of the biggest macro stories of 2018 – the Global Currency market:

1. US Dollar Index corrected another -0.75% last week to +2.3% YTD and remains Bullish TREND @Hedgeye
2. EUR/USD bounced +1.1% last week to -2.1% YTD and remains Bearish TREND @Hedgeye
3. Yen (vs. USD) fell another -0.5% last week to +0.1% YTD and remains Bearish TREND @Hedgeye
4. Argentine Peso bounced +7.6% last week to -49.9% YTD and remains Bearish TREND @Hedgeye
5. Brazilian Real bounced +3.1% last week to -18.2% YTD and remains Bearish TREND @Hedgeye
6. Turkish Lira did NOT bounce last week, dropping -1.9% to -39.5% YTD and remains Bearish TREND @Hedgeye

Can you believe in being long Argentina’s and/or Brazil’s currency after those counter-TREND bounces? I can’t. Both countries remain in Quad 3 (stagflation) heading into Q4 of 2018. Argentina just printed a horrific -4.2% year-over-year GDP report for Q218. 

But… it was supposed to be “different this time” in Latin America. Roger that. Not.

Counter @Hedgeye TREND bounces galore in Global Equity markets, there were too:

1. Emerging Markets (MSCI) bounced +0.8% last week to -10.5% YTD but remain Bearish TREND @Hedgeye
2. Latin American Stocks (MSCI) bounced +3.0% last week to -11.3% YTD but remain Bearish TREND @Hedgeye
3. Russian Stocks (RTSI) bounced +5.0% last week to -0.4% YTD but remain Bearish TREND @Hedgeye
4. Chinese Stocks (Shanghai Comp) bounced +4.3% last week to -15.4% YTD but remain Bearish TREND @Hedgeye
5. Spanish Stocks (IBEX) bounced +2.4% last week to -4.5% YTD but remain Bearish TREND @Hedgeye  

Since my signaling process and I have not believed in any of these bear market bounces in EM or China all year long, it probably won’t surprise you that I say sell the bounces in all of the aforementioned Global Equity exposures this morning.

Admittedly, I am getting interested in buying Spanish Stocks. I have no economic data or quantitative signal to support that interest, yet. But the way the math works is that the countries we went bearish on first (Europe in Q3/Q4 of 2017), get the early look!

Not everything in macro bounced last week:

1. US Tech Stocks (XLK) corrected -0.4% last week to +16.7% YTD and are currently signaling Bearish TRADE; Bullish TREND
2. India’s Stock market (BSE Sensex) dropped -2.4% last week to +5.0% YTD and has recently moved to Bearish TREND @Hedgeye
3. Lumber prices got hammered again for a -8.0% loss last week to -14.5% YTD and are also signaling Bearish TREND @Hedgeye

You don’t need our new machine learning tools to know what US Tech, India, and Lumber all have (had) in common. A: negative immediate-term TRADE Price Momentum. None of these things are where you want to be as the world enters Quad 4 in Q4 either.

The other 2 big week-over-week bounces I’d be a seller of this morning are:

1. Commodities (as in the asset class)
2. US Treasury Rates (long end of the curve)

While the CRB Commodities Index (19 commodities) bounced +1.8% with the USD down last week, it’s only +0.1% YTD and remains Bearish TREND. I get the Quad 2 reasoning for the bounce. The data supported that bounce and the bounce in the UST 10yr Yield.

In Quad 4 (our Q4 2018 forecast that we’ll review on our Q4 Macro Themes call on Thursday) though, long inflation expectations (Commodities) and short Treasuries (biggest net SHORT position currently in all of macro), is not where we want to be.

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

UST 10yr Yield 2.91-3.11% (neutral)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
Shanghai Comp 2 (bearish)
DAX 114 (bearish)
VIX 11.12-14.01 (bullish)
USD 93.35-95.50 (bullish)
EUR/USD 1.15-1.18 (bearish)
YEN 111.02-112.92 (bearish)
GBP/USD 1.29-1.32 (bearish)
Oil (WTI) 68.05-72.32 (bullish)

Best of luck out there this week,
KM

Keith R. McCullough
Chief Executive Officer