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“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.

Very Important Here - 05.13.2019 bull   bear trade deal plunge cartoon

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): 

  1. The headline US INFLATION Cycle peaked in JUL of 2018 at +2.9% year-over-year growth
  2. Then headline INFLATION #slowed to a quarterly average of +1.64% in Q1 of 2019
  3. Now we’re at +1.82% year-over-year inflation in Q219
  4. There’s a knife’s edge between that +1.82% Q2E and our +1.83% Q3 nowcast
  5. 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: 

  1. Rate Sensitivity (falling bond yields) = Utilities (XLU) and REITS (VNQ)…
  2. Organic Growth beating Cyclical Growth = Long Tech (XLK)
  3. 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,


Keith R. McCullough
Chief Executive Officer

Very Important Here - Chart of the Day