Repetitive Counter TREND Bounces

“This repetitive phenomenon is called self-similarity and is a generic characteristic of fractals.”
-Geoffrey West 

Are you a chaser or a fader? Do you get excited when your screens are green? I do. We’ve seen some epic selling opportunities in the last 3-4 months in the US Equity market. In parts of Asian, EM, and European markets, we’ve seen them for over a year now. 

There’s self-similarity to big-short-term bounces to lower-highs on decelerating volume in bear markets.

As West goes on to remind us in Scale (pg 128): “Long before the concept was invented, self-similarity was poetically expressed by the Irish satirist Jonathan Swift in Gulliver’s Travels”:

“So, naturalists observe, a flea
Hath smaller fleas that on him prey;
And these have smaller still to bite’em;
And so proceed ad infinitum.”

Back to the Global Macro Grind…

Welcome to Macro Monday @Hedgeye! On the first day of every week we review what macro markets did in the prior week within the context of our intermediate-term @Hedgeye TREND quantitative research views. 

Let’s start with the Global FX market: 

1. US Dollar Index was down -0.2% last week and remains Bullish TREND @Hedgeye
2. EURO/USD was down another -0.4% last week and remains Bearish TREND @Hedgeye
3. Yen was up another +1.6% vs. USD last week and is a new Bullish @Hedgeye TREND
4. Pound was +0.2% vs. USD last week and remains Bearish @Hedgeye TREND
5. Canadian Dollar bounce +1.9% vs. USD last week but remains Bearish @Hedgeye TREND
6. Russian Ruble bounced +3.1% vs. USD last week but also remains Bearish @Hedgeye TREND

Commodities (Oil in particular) liked the ongoing idea of a Down Dollar Dovish Fed (despite a hawkish jobs report and a 9 year high in US Wage Inflation). That part of the Macro market traded like Quad 3 rather than Quad 4: 

1. Commodities (CRB Index) were +1.4% last week but remain Bearish @Hedgeye TREND
2. Oil (WTI) was up +6.5% last week but remains Bearish @Hedgeye TREND
3. Gold was up another +0.3% last week and remains Bullish @Hedgeye TREND

That said, components of the Commodity market continued to deflate. Copper was down another -1.4% and remains in crash mode. Natural Gas continued its recent Bearish @Hedgeye TREND break-down, deflating another -8.2% last week. 

All the while, US Equity Beta had a big bounce off its oversold December lows with Energy stocks (the worst performing Sector Style during Quad 4 in Q4 of 2018) leading the charge:

1. US Energy Stocks (XLE) were +4.9% last week but remain Bearish TREND @Hedgeye
2. US Consumer Discretionary stocks (XLY) were +2.9% last week but remain Bearish TREND @Hedgeye
3. US Tech stocks (XLK) were only +0.2% last week and remain Bearish TREND @Hedgeye
4. US Utility stocks (XLU) corrected -0.1% last week and remain Bullish TREND @Hedgeye
5. US REIT stocks (XLRE) corrected -0.1% last week and are currently Neutral TREND @Hedgeye 

With the SP500 up +1.9% and the Russell 2000 bouncing +3.2% last week (both remain Bearish @Hedgeye TREND despite the bounce), you’d think Emerging Market stocks would bounce, eh? Nope. 

EM’s MSCI Index was down -1.4% despite a Down Dollar week and is still in crash mode at -20.4% from this day that we went Bearish on Emerging Market Equities in January of 2018. 

Elsewhere in Global Equities, some of the bigger bounces were in markets that had seen the largest Q4 declines: 

1. Russian stocks bounced +4.9% last week but remain Bearish @Hedgeye TREND
2. Austrian stocks bounced +4.1% last week but remain Bearish @Hedgeye TREND
3. Italian stocks bounced +2.8% last week but remain Bearish @Hedgeye TREND 

All the while, US Treasury Bond Bulls continued to get paid: 

A) UST 2yr Yield dropped another -2 basis points to 2.49% and remains Bearish @Hedgeye TREND
B) UST 10yr Yield dropped another -5 basis points to 2.67% and remains Bearish @Hedgeye TREND 

Rather than lose your mind (and money) trying to call “the bottom” in High Beta US Equities, Treasuries bottomed in OCT-NOV with the long-end of the bond market being up for 8 out of the last 9 weeks with relatively low volatility. 

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

UST 10yr Yield 2.56-2.83% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
Utilities (XLU) 51.19-54.00 (bullish)
REITS (VNQ) 71.89-77.90 (neutral)
Industrials (XLI) 60.21-66.25 (bearish)
Energy (XLE) 54.14-60.89 (bearish)
VIX 19.40-36.42 (bullish)
EUR/USD 1.13-1.15 (bearish)
YEN 107.26-111.35 (bullish)
Oil (WTI) 42.55-49.59 (bearish)
Nat Gas 2.70-3.63 (bearish)
Gold 1 (bullish)
Copper 2.58-2.70 (bearish) 

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer