“Did you ever notice that when you blow in a dog’s face, he gets mad at you?”
-Steve Bluestone
Don’t be mad, bro. From a Quad 4 in Q4 Asset Allocation, Sector Style, and Factor Exposure perspective, you may very well be in alpha doggie heaven here in October.
Back to the Global Macro Grind…
Another day, another US equity market reversal into the red… but only in the Sector and Factor Exposures you shouldn’t have been in to begin with. The ones you should be net long were mostly up in a down market. That’s alpha.
To put yesterday’s intraday selloff in context, it was the 16th down day in the last 18 trading days but 5 of 10 US Equity Sector Styles closed UP on the day with the 3 biggest winners being:
- REITS (XLRE) were +1.7% on the day and are -1.9% for OCT to-date
- Utilities (XLU) were +1.4% on the day and are +2.8% for OCT to-date
- Consumer Staples (XLP) were +1.2% on the day and are +1.0% for OCT to-date
Meanwhile the 3 biggest losers (or gainers for the alpha dogs on the short side) were:
- Energy Stocks (XLE) were down another -1.9% on the day and are -13.9% for OCT to-date
- Tech (XLK) was down another -1.7% on the day and is down -11.1% for OCT to-date
- Industrials (XLI) were down another -1.7% on the day and are down -13.3% for OCT to-date
Yep. That’s right, being long Cyclical Quad 4 Underweights like Energy and Industrials was worse than being long Tech so far in OCT!
What does that tell you about how far consensus was off-sides on its cyclical growth and inflation expectations?
Essentially, that’s the point in Quad 4. As you know, that’s when both GROWTH and INFLATION are slowing at the same time. Once we get through Friday’s Late Cycle US Wage Inflation report, you should see this #SlowingOctober data in November.
Can the bond market read it more like Stagflation (Quad 3) while the Equity and FX markets read it like Quad 4?
Sure, in the immediate-term, why not? Since the Fed is going to react on a lag to lagging economic data, you should almost always expect the Fed to pivot from hawkish to dovish too late. Given Trump’s attack’s on Powell, heck … he might be extra late!
This is where the economist in me collides with the strategist. Hopefully all strategists you pay attention to have run money in their careers and respect the almighty signals issued to them daily by Mr. Market.
The other massively huge and relevant TRENDING signal from Mr. Market continues to be a #StrongDollar.
As those of you who have studied the back-tests of Quad 4 returns know, the highest expected value for the US Dollar is when not only the USA is entering Quad 4, but after the ROW (rest of the world) has already entered Quad 4.
That’s why Global Sovereign Bond Yields like those in Switzerland, Japan, and Germany continue to signal what the #GlobalDivergences in the economic cycle have – slower for longer from #PeakCycle inflation expectations.
UST 10yr Yield 3.01-3.23% (bullish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
Utilities (XLU) 52.67-55.38 (bullish)
REITS (VNQ) 76.38-79.27 (neutral)
Industrials (XLI) 66.47-71.75 (bearish)
VIX 16.56-27.20 (bullish)
USD 95.10-96.90 (bullish)
EUR/USD 1.12-1.15 (bearish)
YEN 111.75-113.25 (bearish)
GBP/USD 1.27-1.30 (bearish)
Oil (WTI) 65.08-69.96 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
