“Like the weather, markets are turbulent.”
-Benoit Mandelbrot
Happy Halloween! If you want to dress up as something really scary on a US college campus today, dress up as The Brot and hang out in the faculty lounge of an Establishment Econ Department.
As many of you know, most of what I think about markets, their turbulence, and volatility comes from Benoit Mandelbrot, aka The Brot. Fractal Geometry was so scary to the establishment that Yale didn’t give him tenure until he was 75 years old.
Wonder why? “In finance, I believe the conventional models and their recent “fixes” violate the Hippocratic Oath. They are not merely wrong; they are dangerously wrong” (The (mis)Behavior of Markets, pg 276). He wrote that in 2004.
Back to the Global Macro Grind…
Trick or TREND? Momentum and High Beta Growth Bears are going to be getting quite a treat this morning with what looks to be some actual follow through to an actual US stock market up day yesterday.
As a top-performing client in Toronto (i.e. his fund is up in OCT) told me yesterday, “I fully understand Quad 4. It just means I have to keep selling rips like I was buying those damn dips for the last 3 years… but I need more rips!”
By any stock market history measure, a +1.6% day for the SP500 is a good rip. The rip was even more fun in the 2 Sector Styles (Energy and Industrials) that I called out yesterday as being a worse place to be than Tech in OCT of 2018:
- Energy Stocks (XLE) were +2.3% on the bounce to -11.9% for OCT to-date but remain Bearish TREND @Hedgeye
- Industrials (XLI) were +2.1% to -11.5% for OCT to-date but remain Bearish TREND @Hedgeye
Not ironically, every single Sector in the SP500 bounced on bounce day. That’s a very good thing for those of you who are long the Top 2 Sectors (from both a Quad 4 fundamental playbook and @Hedgeye TREND signal perspective):
- Utilities (XLU) were up another +0.4% to +3.2% for OCT to-date and remain Bullish @Hedgeye TREND
- Consumer Staples (XLP) were up another +2.0% to +3.0% for OCT to-date and remain Bullish @Hedgeye TREND
The answer on Trick vs. TREND is an easy one for me because I have a multi-factor signaling #process to contextualize that.
In terms of ranking positions, that’s why I can also say that while Healthcare (XLV) is a relative long vs. Tech (XLK) in Quad 4, it doesn’t mean that its @Hedgeye TREND signal has to be as strong as those I currently have in Utes and Staples.
Now that plenty of our clients fully understand our Fundamental GIP (4 Quadrant Growth, Inflation, Policy) Model, many of them are either trying to front-run what our model is projecting and/or time the turns better than I can.
That’s totally humbling and cool. But remember, I built the QUANTITATIVE signaling process as an overlay to the FUNDAMENTAL research process to front-run myself! So I guess we’re all trying to front-run each other. lol
“Nice call on Quad 4. But why did it have to happen so fast? Doesn’t that mean it has to end soon?”
A) If I thought the call was over, I wouldn’t keep making the call on every bounce
B) If the melt-down in Global Equity markets is over, why are they all still signaling Bearish @Hedgeye TREND?
Again, the signaling process is built to map and measure mathematical risk realities like:
A) Lower-lows vs. higher-lows within the immediate-term @Hedgeye Risk Range?
B) Volatility – was it an episodic short-term cluster or is it now TRENDING?
On US Equities, for now at least, there isn’t one signal in my quantitative risk management model that says the fundamental model’s view (i.e. 5 more months of Quad 4 until we get to Quad 3) has run its course.
On US Treasury Yields, however, the signal remains Bullish @Hedgeye TREND on the UST 10yr Yield (3.03% is TREND support) with the top-end of the @Hedgeye Risk Range signaling a re-test of the 3.23% three year highs.
Why? One obvious reason is that the Fed remains hawkish on a lag to lagging economic data. That’s not new. Another is that we’re probably going to get another uber hawkish Wage Inflation report (against an easy compare) on Friday.
So, for my money, since I sold some Treasuries at 3.06% last week, I’m looking for 3.23% to buy those back. That’s how I always start to get into a new position (I was bearish on the Long Bond for most of the 2.5 years of US #GrowthAccelerating).
Buy some at the low-end of the range; sell some at the top-end of the range. Unlike some econs who have these super optimized relative value “level” of rates where they’re interested in buying or selling bonds, that’s not what I do.
What I really like to do is gross up my position when both the fundamental and quantitative parts of my process agree. That’s why shorting more Momentum, High Beta, and Tech is a bigger position than buying Treasuries, until Friday.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 3.03-3.23% (bullish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
Utilities (XLU) 53.01-55.30 (bullish)
Consumer Staples (XLP) 53.16-55.92 (bullish)
Industrials (XLI) 66.54-70.95 (bearish)
VIX 18.01-26.90 (bullish)
USD 95.11-96.98 (bullish)
Oil (WTI) 65.08-69.53 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
