“I expect the meetings to be very successful.”
-Donald Trump
That’s very good because they really need to be. The SP500 snapped @Hedgeye TREND support for the 1st time since January yesterday.
But what happens if the tweets about the meetings don’t rhyme with economic reality? In the end, The Cycle has a central tendency to trump everything.
Currently in Q2 we have The Global Economic Cycle in Quad 3 (mean and mode of the Top 20 countries in our GIP Model). That’s good for plenty of asset allocations. Back to Global Quad 4 would not be.
Back to the Global Macro Grind…
Instead of using lots of adjectives, you probably noticed that lots of my tweets have lots of numbers. Since I’m not a member of any political party, I have a hard time reading qualitative and biased spew.
Yeah, tell me what you really think.
To be precise about this, what I think is that if the SP500 can’t get back above 2828 and hold that level of what was @Hedgeye TREND support, that’s bad. If it can, that’s good.
What’s also good enough is where USA’s goldilocks GDP nowcast is tracking for Q2:
A) Our real-time nowcast for US GDP in Q2 = +2.72% year-over-year growth
B) That imputes a headline US GDP reading in Q2 = +2.19% q/q SAAR
C) It’s also assuming a headline US Inflation (CPI) reading in Q2 = +1.82% year-over-year growth
Setting aside that we still think year-over-year SP500 Earnings growth will be negative year-over-year in both Q2 and Q3, where this gets tricky is in our Q3 outlook for INFLATION.
If headline INFLATION were to slow further from where we’re now-casting it for Q3, that would drive the US economy back into Quad 4 from Quad 3. If that happened, that’s really not good.
As you can see in today’s Chart of The Day (slide 15 of the current Q2 Macro Themes deck):
- The headline US INFLATION Cycle peaked in JUL of 2018 at +2.9% year-over-year growth
- Then headline INFLATION #slowed to a quarterly average of +1.64% in Q1 of 2019
- Now we’re at +1.82% year-over-year inflation in Q219
- There’s a knife’s edge between that +1.82% Q2E and our +1.83% Q3 nowcast
- Then it’s easier to see reflation in Q419 at +1.97% (because the compares are so easy)
Essentially, I think this is the most important US Equity market debate right now.
If the US economy were to slip back into Quad 4 in Q3 (with an #EarningsRecession in motion), I’d expect a pervasively Bearish @Hedgeye TREND in something like the SP500.
At -12.5% from where The Cycle (USA) peaked in Q3 of 2018, the Russell 2000 and the Financials (XLF) are already pervasively Bearish @Hedgeye TRENDs that continue to make a series of lower-highs.
That’s because SMALL CAP and Financials aren’t where you want to be in Quad 3 either!
In Quad 3 you want to be long real #GrowthSlowing via:
- Rate Sensitivity (falling bond yields) = Utilities (XLU) and REITS (VNQ)…
- Organic Growth beating Cyclical Growth = Long Tech (XLK)
- Inflation #Accelerating = Long Energy (XLE)
But in Quad 4 you want to be short Tech (XLK) and Energy (XLE)…
Since I am currently Long Utilities (XLU), REITS (VNQ), Tech (XLK), and Energy (XLE), that would mean 50% of my Equity Sector allocations would be wrong if the USA falls back into Quad 4.
Should I lose my mind about that? Or buy more Tech and Energy on the damn dip? Yesterday in Real-Time Alerts, I played the #process the way the rules said I should:
A) Tech (XLK) was signaling immediate-term #oversold at the low-end of my @Hedgeye Risk Range
B) And, unlike SPY, Tech (XLK) was holding @Hedgeye TREND support of $70.71
When Tech (XLK) broke bad during Quad 4 in Q4 of 2018, you had plenty of opportunities to sell/short bounces. That’s neither the Quad the USA is in nor the TREND signal I have currently.
So, just like any good Blackjack player, yesterday I didn’t panic/sell and “hit on a 6”…
That certainly doesn’t mean my highest probability bet will pay off today… or that Trump's latest classification of “very successful meetings” will play out within 3-4 weeks either.
It simply means that I continue to make unemotional and apolitical decisions within the framework of our rules based #process, however close to the cliff (Quad 4) we may come in Q3.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 2.39-2.51% (bearish)
SPX 2 (neutral)
RUT 1 (bearish)
NASDAQ 7 (bullish)
Utilities (XLU) 56.70-59.00 (bullish)
REITS (VNQ) 85.05-87.99 (bullish)
Energy (XLE) 62.60-65.35 (bullish)
Financials (XLF) 26.48-27.63 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 209 (bearish)
DAX 116 (bullish)
VIX 15.01-23.04 (bullish)
USD 96.57-97.80 (bullish)
Oil (WTI) 60.39-63.50 (bullish)
Gold 1 (bullish)
Copper 2.70-2.83 (bearish)
AMZN 1 (bullish)
FB 180-198 (bullish)
GOOGL 1126-1199 (bearish)
NFLX 341-366 (bearish)
TSLA 221-254 (bearish)
Bitcoin 5 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
