“NASDAQ on the cusp of a speedy bear market exit.”
-Wall Street Journal
That’s the kind of Old Wall Media headline you want to see if you were buying SPY puts on Tuesday. It’s also what you want to see if you’ve been buying the damn dips in Treasuries and Gold this week.
Back to the Global Macro Grind…
I’ve been on the road seeing our Institutional Clients from Chicago to California this week. Not everyone wants to fight Trump Tweets or the Fed at this point. That’s embedded in the VIX trading at 15… and I see a big opportunity in that.
Not everyone saw a big selling opportunity in Quad 4 shorts like Oil, Energy Stocks, and the NASDAQ back in September, so I’m not especially concerned with whatever chart-chasing was implied in that consensus as I see in this one today.
With some highly levered CEO’s going as far as to say things like “the bottom of the cycle is here in Q1”, how can you blame anyone who doesn’t have an accurate meausuring and mapping #process for The Cycle for believing them?
Alleged “speedy bear market exits” happen…
- Exhibit 1: from #PeakCycle US CORPORATE PROFITS back in 2000, the SP500 crashed -29.3%, then ramped +22% from March to May, then collapsed again
- Exhibit 2: from #PeakCycle US GDP in Q1318 to the DEC 2018 low, the NASDAQ crashed -23.7%, then rallied +22%
- Exhibit 3: from #PeakCycle US INFLATION in Q318 to its DEC 2018 low, Oil crashed -41%, then rallied +23%
What’s up with these +22-23% ramps? Are they sustainable? Would you have had them without?
- GROWTH #slowing
- INFLATION #slowing
- PROFITS #slowing
And… the Fed going Dovish TWICE in 3 weeks following the aforementioned lows for the aforementioned reasons?
I know, it’s sometimes hard when you’re under the gun staring at daily P&L and career risk management decisions to take a step back, breathe, and remember where you are in The Cycle…
Inasmuch as The Machine perpetuated crashes in major US stock indices and heavy inflation weights like Oil to immediate-term #oversold lows, it has a criticial contribution to epic bounces to lower-highs.
I’d be lying to you if I said I knew the Russell 2000 was going to crash -27.2% from late AUG to late DEC of 2018. All I knew is that I didn’t want to be long of it during Quad 4 in Q4.
I also know that I don’t want to be long:
- Industrial or “Old China” on Trump tweets
- European Stocks as Italy is the 1st European economy entering a #recession
- US Financials (XLF), Materials (XLB) or Consumer Staples (XLP) as we transtion from Quad 4 to Quad 3
On the other side of that, I’m already long big things that are working:
- Treasuries (EDV, TLT, SHY) across the curve
- Gold (GLD) and Housing (ITB)
- REITS (VNQ) and Utilities (XLU)
And as we transition to Quad 3 from Quad 4 in the next two quarters, my #process will have me buying corrections in Energy Stocks (XLE and XOP) and selling bounces to lower-highs in sub-sectors like US Retailers (XRT).
That’s the thing about a repeatable #process that not only goes both ways (long and short) in anything you can allocate your assets to. It doesn’t panic or particularly care about “narratives” that are perpetuating that panic.
In the immediate-term (next 3 weeks) “is the bottom in?” Versus that DEC 24, 2018 low, for now, the answer is yes. But the top is also in. And less than 20% of questions I get have to do with that, after the up move.
I’m not licking my finger and/or making up a market “multiple” to tell you where tops and bottoms are either. I’m simply using my immediate-term Hedgeye Risk Range of 2 for the SP500 in order to give me a high probability answer.
The only thing we know about stock market multiples is that Quad 3 sees the biggest multiple compression vs. other Quads. That’s because Quad 3 = Margin Compression. As The Cycle slows, revenues slow… and margins compress. #EarningsSlowing
If you go from Quad 3 back to Quad 4 (like the Italian economy just did), the probability rises that your country is going to enter a recession. We don’t have that call in the USA yet. We have had it in Italy. We also have it developing in France.
That’s why I haven’t chased 1 bounce in the Italian stock market going back to when we went bearish on #EuropeSlowing over 1-year ago. Patience and process is required to not chase. I see both of those ‘P”s in low supply out there right now.
Our immediate-term Global Macro Risk Ranges (wiith intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.62-2.78% (bearish)
UST 2yr Yield 2.43-2.60% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 6 (bearish)
Utilities (XLU) 52.64-55.57 (bullish)
REITS (VNQ) 79.50-85.01 (bullish)
Industrials (XLI) 68.77-74.40 (bearish)
Housing (ITB) 32.04-34.80 (bullish)
DAX 11066-11370 (bearish)
VIX 15.01-20.59 (bullish)
USD 94.80-96.70 (bullish)
EUR/USD 1.12-1.14 (bearish)
Oil (WTI) 52.00-55.62 (bearish)
Gold 1 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
