Did You Buy The Dip?

“In blending, the brain combines two or more sources in novel ways.”
-David Eagleman 

That’s from a great book I recently finished called The Runaway Species. “Bending, breaking, and blending are tools our brains use to turn experience into novel output.” (pg 105)

Blending GROWTH and INFLATION in a novel way (in TRENDING rate of change terms) explains quarterly returns by asset class, sub-sector, and factor exposure.

Instead of jumping from Macro Tourist headline to headline, the only place you’re going to read about that rate of change at the top of every risk management morning on Wall Street is right here in the Early Look and/or on my Twitter stream.

Back to the Global Macro Grind…

It was 43-40 #Patriots over the Chiefs last night, and it’s Macro Monday @Hedgeye! For those of you who are new to our measuring and mapping #process, on Mondays we review what happened in macro last week within the context of @Hedgeye TRENDs.

While the 1-day bounce (after 6 straight down days for the SP500) was fun to watch on Friday, we’re right back in the soup this morning with a nasty selloff in Asian Equity markets as both China and Japan are in Quad 4 in Q4 inasmuch as the USA is.

From a Global Currency market perspective, last week was relatively quiet when you compare it to the Quad 4 (when you blend growth and inflation slowing at the same time) draw-downs across Global Equities:

1. US Dollar Index corrected -0.4% last week to +3.4% YTD and remains Bullish TREND @Hedgeye
2. EUR/USD bounced +0.3% from its #oversold signal last week to -3.7% YTD and remains Bearish TREND @Hedgeye
3. Yen had the biggest bounce at +1.4% vs. USD = +0.4% YTD and remains Bearish TREND @Hedgeye
4. Canadian Dollar dropped -0.7% vs. USD to -3.5% YTD and remains Bearish TREND @Hedgeye
5. Bitcoin got blasted for another -5.0% loss vs. USD to -56.6% YTD and remains Bearish TREND @Hedgeye

Yeah, I know. Bitcoin may or may not be a currency or a commodity. All I know is a #crash when I see one. That’s become very obvious in what’s now formerly known as “globally synchronized economy” expectations too:

1. Chinese Stocks (Shanghai Comp) were down another -7.6% last week to -21.2% YTD and remain Bearish TREND @Hedgeye
2. Emerging Market Stocks (MSCI) were down another -4.6% last week to -17.6% YTD and remain Bearish TREND @Hedgeye
3. European Stocks (EuroStoxx 600) were down another -4.6% last week to -7.8% YTD and remains Bearish TREND @Hedgeye

Yep, as hard as it may have been to blend the ideas of China, EM, and Europe #slowing (all at the same time) 10 months ago is as easy as it is to see the risks associated with them in hindsight.

But what about the USA? I thought consensus thought (after we thought the same as Mr. Market did for 9 quarters in a row, i.e. #GrowthAccelerating) there wasn’t much risk of a Quad 4 Hurricane hitting in Q4?

At the US Equity Sector Exposure level, here were the 3 worst places to be last week:

1. Basic Materials (XLB) were down -6.7% last week to -11.2% YTD and remain Bearish TREND @Hedgeye
2. Industrials (XLI) were down -6.4% last week to -2.3% YTD and remain Bearish TREND @Hedgeye
3. Financials (XLF) were down -5.6% last week to -5.3% YTD and remain Bearish TREND @Hedgeye

And the best place to be was being long Utilities (XLU) at only -1.3% week-over-week to +0.5% YTD… so it definitely paid to stay away from those “charts” Old Wall technicians were loving in both Industrials and Financials up until less than a month ago, eh.

I know they all love the chart of the US 10yr Yield right now. They loved how Junk (JNK) and High Yield “looked” until they broke to Bearish @Hedgeye TREND last week too! High Yield was +13 basis points last week with the UST 10yr Yield down -7 basis points btw.

So… you want to be careful when you blend a “good looking chart” with a #slowing rate of change economic outlook. You also want to be careful at the Equity Factor Exposure level:

1. HIGH BETA stocks were down -5.7% last week to -1.0% YTD and remain Bearish TREND @Hedgeye
2. Top 25% SALES Growers were down -5.0% last week to +8.3% YTD after recently moving to Bearish TREND @Hedgeye
3. Top 25% EPS Growers were down -5.0% last week to +6.2% YTD after recently moving to Bearish TREND @Hedgeye

*Mean performance of Top Quartile vs. Bottom Quartile, SP500 Companies

“Recently moving to Bearish TREND @Hedgeye”, for us means that in the last week of September of 2018 (on our Q4 Macro Themes Call) we moved to outright Bearish on Sector Exposures like Tech and Factor Exposures like High Beta and Momentum.

Notwithstanding the Fear Factor in Equities space (front-month VIX) ripping +44% to close at 21.31 last week, the other interesting development was that the #1 net LONG position in Global Macro is actually US Equity Beta (SP500)!

Yep. Looking at non-commercial CFTC futures and options positioning, everyone knows the biggest net SHORT position remains US Treasuries… but look at this move in SP500 (Index + E-mini) contracts:

1. SPX net LONG position ramped +31,800 contracts last week to +244,732 contracts
2. That equates to a +2.19x move using a 1yr z-score with the 3 year MAX position being +249,628 contracts!

So did you buy the dip? Consensus sure did. And that’s probably why the US stock market just kept on dipping. While it seems absolutely crazy to me as we enter Quad 4 in Q4, consensus macro is short Treasuries and long the US stock market, in size!

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

UST 10yr Yield 2.98-3.27% (bullish)
SPX 2 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 52.10-54.68 (bullish)
Industrials (XLI) 72.53-76.50 (bearish)
Shanghai Comp 2 (bearish)
VIX 14.06-26.27 (bullish)
USD 94.50-95.90 (bullish)
EUR/USD 1.14-1.16 (bearish)
YEN 111.51-114.75 (bearish)
Gold 1180-1234 (neutral)
Bitcoin 6109-6511 (bearish)

Best of luck out there this week,
KM 

Keith R. McCullough
Chief Executive Officer