But what if...

“To have a full understanding of cycles, that’s not enough.”
-Howard Marks 

As Howard Marks goes on to suggest in his new book, Mastering The Market Cycle, “the events in a cycle shouldn’t be viewed merely as each being followed by the next, but – much more importantly – as each causing the next.” (pg 22) 

Essentially, proactively predictable behavior is what our GIP Model (Growth, Inflation, Policy) is designed to probability weigh, daily. If US growth and inflation slows at the same time (Quad 4), that should cause the Fed to pause on its prior Quad 2 rate hike path. 

“But what if they pause… and go easy… isn’t that good for the stocks that blew up during Quad 4 in Q418?” Yes, from a price. But it’s better for reflation trades like Energy (XLE). It’s also great for things we like alongside Treasuries and Gold, like REITS (VNQ). 

Back to the Global Macro Grind… 

It’s Macro Monday @Hedgeye. Welcome back to our long-standing grinders of the data-dependent gridiron and thanks to all of you who are new to our measuring and mapping #process. 

With the SP500 down -0.2% (vs. Gold +1.5%) last week, we finally got a resumption of what we call an intermediate-term @Hedgeye TREND. Those shouldn’t be confused with immediate-term TRADEs that suck people into believing something has changed.

Since the ROC (rate of change) of the economic data is predictively tracked by our algorithms, daily, there’s rarely any confusion on @Hedgeye TRENDs there. Market signals can front-run the data we don’t see, however – so I’m always on watch for those. 

If the following wasn’t happening on a down week for US stocks: 

1. US 10yr Treasury Yield down 3 basis points to 2.75% and down for the 9^th week in the last 12
2. REITS (VNQ) leading US Equity Sector Style Factors at +1.3% on the week to +7.9% YTD
3. Gold and Silver +1.5% and +2.3% on the week, respectively (both remain Bullish TREND @Hedgeye) 

I’d be more sympathetic to the general “but what if… stocks only go up” line of questioning that has been populating my inbox as short-term performance pressures on Portfolio Managers mounts in month 1 of 2019. 

With front-month US Equity Volatility down -2% on the week to -32% YTD, what if you chase High Beta US Equities here? 

1. You’d be buying stocks in the same 16-18 VIX range that you could have at the beginning of December of 2018 (not good)
2. You’d be making the same mistake you could have already made 4x since the US stock market peaked in AUG/SEP of 2018

If Gold and Treasuries were breaking down (like they were in the 1^st six months of 2018 when the US economic data and earnings growth was tracking in Quad 2), then I’d be thinking that I’m missing something. In fact, I’d be missing having a process altogether! 

While I can always be missing something, there’s also a good probability that The Cycle call we started making back in September is still right. There’s also a short Global Equity component to that (relative to long Sovereign duration): 

1. London’s FTSE was down -2.3% last week to +1.2% YTD and remains Bearish TREND @Hedgeye
2. Swiss Stocks (SMI) were down -1.2% last week to +5.9% YTD and remain Bearish TREND @Hedgeye
3. Singapore’s stock market was down -0.7% last week to +4.3% YTD and remains Bearish TREND @Hedgeye 

Q: Away from The Cycle data being reported, what’s the biggest catalyst for certain stock markets and their Sector/Factor exposures to go down?
A: Stocks going down. 

There’s also the relationship between Sovereign Yields and how Credit trades: 

1. US 2yr Yield was down 1 basis point to 2.61% last week and remains Bearish TREND @Hedgeye
2. High Yield OAS Spreads WIDENED +18 basis points last week to +4.40% and remain Bullish TREND @Hedgeye 

When a bond yield is Bearish TREND you want to be long those bonds. When a bond yield is Bullish TREND you do not want to be buying dips in those bonds (because they aren’t dips). 

Yeah, I can see why covering High Beta Equity Shorts and buying High Yield Bonds made sense, in hindsight, off our immediate-term TRADE #oversold signals in late December. But I can also see why you should keep selling the rips right here. 

Another confirming (i.e. TRENDING) market signal that mattered in macro last week was that both Commodities (CRB Index) and Oil (WTI) failed @Hedgeye TREND resistance, despite the US Dollar Index being down -0.5% on the week: 

1. CRB Index (19 commodities) was down -0.8% on the week and remains Bearish TREND @Hedgeye
2. Oil (WTI) was down -0.9% on the week and remains Bearish TREND @Hedgeye 

While those TREND signals have a higher-probability of reversing to Bullish TREND @Hedgeye when the US economy enters Quad 3, last week macro markets traded like the quadrant the US entered back in September (Quad 4). What if that’s still the TREND?

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

UST 10yr Yield 2.65-2.79% (bearish)
UST 2yr Yield 2.49-2.62% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
Utilities (XLU) 52.00-54.35 (bullish)
REITS (VNQ) 77.08-80.91 (bullish)
Housing (ITB) 31.80-33.32 (bullish)
Shanghai Comp 2 (bearish)
VIX 16.80-22.96 (bullish)
USD 95.06-96.35 (bullish)
Oil (WTI) 50.07-54.60 (bearish)
Gold 1 (bullish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer