“Poetry and lyrics are very similar, making words bounce off the page.”
-Taylor Swift

Yes I just quoted Taylor Swift and no I’m not a poet. While words on Wall Street (like “recession”) have a central tendency to get people’s attention, we won’t write about anything like that unless it’s backstopped by numbers.

Sell The Bounce - 1400351770005 TaylorSwift 006

Back to the Global Macro Grind…

Good morning from Boston, MA where Darius and I are ready for Day 2 of Institutional client meetings. Most of the time we start meetings by A) reviewing and/or explaining the 4 Quadrant #Process and B) providing an update on what Quad the USA is in.

There is no waxing poetically. There are only 2 words both locally and globally so far in Q319: Quad Four.

Once we’ve got that covered, we dig into the next 100 or so slides that all have numbers (time-series) with some summary words at the top of the page that say in plain English what the ROC (rate of change) numbers are saying.

At least 80% of our ROC “deck” deals with The Cycle and cycles (early, mid, late) within the cycle. The other 20% (or less) explains my quantitative risk management and signaling #process (TRADE, TREND, TAIL). All of those updates are in my notebook.

No one really wants to talk about what the market is signaling until it signals something new. When that something new happens to coincide with changes in market volatility, that 20% of the deck can take up 80% of the discussion.

To review my process in its entirety, it’s effectively an A/B Test:

  1. Data-driven Fundamental Research (what Quad is a country in and heading into)
  2. The Market’s Signal (when is the market front-running that next pivot into a new Quad)

*Note: at no time will I use the word “valuation”, unless the client wants to talk about that

Unlike the ROC (rate of change) data embedded in The Cycle, which are facts, “valuation” is an opinion. I do have opinions on valuation, but I don’t think you should pay me for those words until I articulate my view on The Cycle.

What you should pay for are the numbers that drive the words ACCELERATING and DECELERATING.

This is not meant to offend valuation experts. If my analysts show me an “expensive” stock and the company is about to show it’s first REVENUE #deceleration of The Cycle, I’ll like that short idea better than a company that’s been guiding down for a year.

Conversely, if my analyst shows me a “cheap” stock (where the company has been guiding down for multiple quarters), that’s cheap on our view of The Cycle’s numbers, and an potential REVENUE #acceleration, voila! I’m listening on that long idea.

But, again, I don’t start with “valuation.” It’s simply something that will augment my gross exposure to an idea.

If you want to get me interested in a SHORT idea right now, I care more about its Factor Exposures than its valuation. Show me equities and credits that have:

  1. HIGH BETA
  2. GROWTH
  3. HIGH SHORT INTEREST

And I’m all ears, especially if those equities and credits are breaking down on my @Hedgeye Bearish TREND signal.

What’s most interesting right now (as it was during our Quad 4 in Q4 of 2018 call) are the breakouts in both Tech (XLK) and Consumer Discretionary (XLY) volatility.

Since my signal is built using a 3-FACTOR model (Price, Volume, and Volatility) and focusses specifically on changes in the volatility of volatility, new breakouts in vol space are very bearish for the securities undergoing those Phase Transitions.

As a fundamental ROC overlay, with both US Tech and Consumer Discretionary Earnings having #slowed to -6.6% and -1.7% year-over-year (SP500 aggregate EPS growth by Sector), respectively, earnings are slowing now at a faster rate too.

Therefore, there are only 3 words I’ll use in meetings today (on those 2 Sector Styles): Sell The Bounce.

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

UST 10yr Yield 1.61-1.91% (bearish)
SPX 2811-2948 (bearish)
RUT 1 (bearish)
NASDAQ 7 (bearish)
REITS (VNQ) 87.34-89.94 (bullish)
Financials (XLF) 26.19-27.73 (bearish)
VIX 15.37-25.67 (bullish)
USD 97.00-98.47 (bullish)
EUR/USD 1.10-1.12 (bearish)
Oil (WTI) 50.88-55.51 (bearish)
Gold 1 (bullish)
Copper 2.51-2.63 (bearish)

Best of luck out there today,
KM

Keith R. McCullough
Chief Executive Officer

Sell The Bounce - Short High Beta