“And he puzzled and puzzled 'till his puzzler was sore. Then the Grinch thought of something he hadn't before. What if Christmas, he thought, doesn't come from a store. What if Christmas, perhaps, means a little bit more.”
-Dr. Seuss
If you are a stock market bear, there is no doubt that yesterday made you feel a bit like a Grinch. After all, the roughly 5% performance by the major indices was one of the largest moves we’ve seen by the stock market since 2009.
Conversely of course, if you were a bull going into yesterday, you were probably downright turning as green like the Grinch as, prior to yesterday, the markets were poised to print literally their worst December performance ever. Yesterday, the "rally” was widespread as well as every stock in the SP500 finished in the green with the exception of Newmont Mining.
Certainly, Dr. Seuss wasn’t thinking of us stock market operators when he started writing his more than 60 children’s books. But the analogies to make are easy enough. One thing is for sure, despite one record day, it’s unlikely that anyone catches Theodor Seuss Geisel’s (aka Dr. Seuss) record breaking career of selling more than 600 million copies of his book.
Anyone that grew up in the Western Hemisphere more than likely grew up reading or being read Dr. Seuss’s books. While the term “Grinch” has become synonymous with someone that is unduly grumpy, the concept the “puzzler” is probably most synonymous with the recent stock market action. The whip saw action in the stock market in the action is sure to puzzle many of us.
Back to the Global Macro Grind…
Despite how puzzled your puzzler might be making you feel, you should have no doubt this is still a risky environment if you’re bullish of equities. Literally all of the risk ranges in our proprietary models remain negative for the major stock market indices and this includes most sector specific indices as well. A key reason for this in our price, volume and volatility analysis is that volatility remains heightened.
In the Chart of the Day, we’ve actually highlighted volatility as measured by the VIX going back a year. As the chart emphasizes, despite the sell off in the VIX yesterday, at roughly 31 on the VIX we are still at levels we haven’t seen since the shake out in volatility since early February this year.
Back then when the VIX spiked, they blamed it on the “machines”. Now of course the blame game also includes the “machines”, but in addition includes Trump, the Democrats, student debt, the deficit, the Fed, the debt market, Steve Mnuchin ... I mean you name it for the blame game as to why the stock market is selling off. Some of you savvy analysts are probably realizing that there is also this sneaky thing called #Quad4 happening.
And in as much as a major rally in the stock market feels nice for those long of equities, it doesn’t change the reality of slowing growth. In that regard, having a process to analyze the puts and takes of the economy certainly helps. Needless to say, a one day rally in stocks, even though we do respect when Mr. Market speaks, hasn’t changed our view of economic reality. Only the numbers will do that.
Turning back to volatility for a second, from a purely quantitative and trading perspective it remains a key reason to remain cautious. As you know, the VIX measures the expectation for volatility over the short run. To be precise, it is a measure of the expected annualized change over the ensuing 30 days. Make no mistake about it, with a VIX above 30 our risk ranges remain wide and the expectation of “change” remains significant.
As noted by our models, the markets remain solidly bearish. The current ranges on the SP500 and Nasdaq are 2,330 to 2,513 and 6,111 to 6,740, respectively. So in Hedgeye parlance, the markets are at the high end of a bearish range. We don’t “puzzle” when things like this happen, but rather our market mapping process takes it as an opportunity to trim positions we like and re-load on shorts we like even more.
Now of course the rally yesterday was also fueled by some good news the stock market punditry will have you believe. In fact, consumer spending was huuuge this holiday season they will tell you. And at face value that is true, but that doesn’t tell us much about the future of spending or the underlying profitability of the consumer companies.
Our resident retail guru Brian McGough and his team summed it up best this morning in their morning note:
“Nice low-volume relief rally for the XRT yesterday on news that Mastercard data – which has proven to be very directionally accurate re spending strength – was up 5.1% through Dec 25th. Am I surprised by strong data? Not one bit. Inventory levels were positioned to drive strong comps – and promotions were there to back it up. When reviewing these sales datapoints, keep in mind that that they say ZERO about profitability. Those datapoints don’t start to stroll in until mid-Jan, around when companies are opening the kimono at ICR (14th-16th). That’s when I think we start to see 2019 estimates come down more broadly.”
Stocks may be “cheap”, but they are only cheap to the extent you believe consensus expectations. In truth, falling estimates and slowing economic growth can make stocks looks expensive pretty darn quickly.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.70-2.91% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6111-6740 (bearish)
Utilities (XLU) 51.01-57.18 (bullish)
Consumer Staples (XLP) 47.82-53.54 (bearish)
REITS (VNQ) 71.23-81.20 (bullish)
Industrials (XLI) 59.94-64.48 (bearish)
VIX 19.78-37.06 (bullish)
USD 95.61-97.45 (bullish)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
