“To know that we know what we know, and to know that we do not know what we do not know, that is true knowledge.”
-Copernicus
Did you know that yesterday’s US Equity market moved -0.01% (SPY) but there was an epic, but not fully loaded, #Quad2 Rotation? Do you know if it’s the new TREND or just a preview of what a #Quad4 to #Quad2 Rotation could look like come NOV-DEC of 2019?
Back to the Global Macro Grind…
Seriously, if you’re already long #Quad2 (ex-Software Cloud Bubble Multiple ETF, IGV, which we added to the short side of our ETF Pro product in recent weeks):
- You crushed it yesterday .. and
- You got crushed with that same book last Tuesday
Yep, everyone is nailing it so now this is going to get a lot more fun.
Ex-Software “Stocks”, which have to lap their toughest capex comps in Q4, where we’ll likely be long is what was working yesterday:
- Oil & Gas Stocks (XOP) were +5.6%
- US Bank Stocks (KRE) were +3.5%
Those are some of the Sector Exposures that you want to be long in #Quad2, but the companies still have to report why we’ve been short them during Q3 Earnings Season (they’re shorts during #Quad4). That’s why I added to my US Bank Shorts (KRE) yesterday.
Maybe I’m overstaying my welcome. Maybe I’m not. I know that I don’t know inasmuch as I know you probably don’t.
This is the essence of The Game. On some major game time decisions, I have to make a call and go with it. The “timing” component of this is all #process. It has nothing to do with “valuation” or “feel”:
- Both the Financials (XLF) and Bank Stocks (KRE) are at the top-end of my @Hedgeye Risk Ranges and …
- SPY, Tech (XLK), and Fins (XLF) have implied volatility DISCOUNTS of -44%, -47%, and -44% (vs. 30-day realized)
Since I never buy (chase the FOMO) at the top-end of the range, this is a relatively easy decision for me this morning. It doesn’t mean it’ll be easy to be right. It’s more important to be disciplined than expect to always be right.
What would have me NOT add to #Quad4 shorts this morning (and NOT buy more Treasuries and Gold)?
- If the US Dollar Index broke down from Bullish to Bearish @Hedgeye TREND
- If Oil (WTI) was breaking out from bearish to Bullish @Hedgeye TREND
- If UST 10yr Yield broke out above @Hedgeye TREND resistance
None of that is happening. Therefore I’ll do what I’m thinking is probably harder for people to do today than it was only LAST TUESDAY when ALL of that “felt good.”
Most of my risk management discussion so far this morning has to do with my macro market SIGNALLING #process. What about the new economic data that would confirm or deny “that there’s a chance for a marginal #Quad2” later in Q4?
Here’s DDDD’s (Data Dependent Darius Dale) incoming #DataDump from this morning:
- Japanese Machine Tool Orders slowed back to -37.1% YoY in AUG, just above the cycle-low seen in JUN. They’ve been contracting every month since OCT and continue to signal the global industrial cycle has yet to reach an investable bottom.
- Speaking of, Europe’s manufacturing recession continued on per the JUL Industrial Production data out of France (-0.2% YoY) and Italy (-0.7% YoY). Not new news given the level of the PMIs, but this represents explicit hard data confirmation nonetheless.
- Manpower Survey data out highlighting the health of Asian labor markets heading into Q4:
- Improving: Australia, India, Japan
- Deteriorating: Taiwan, China, Hong Kong
As you can see in today’s Chart of The Day (no reading required, it’s color coded in ROC (rate of change) terms), there’s actually no reason to believe that anyone knows anything about anything “turning”, economically, at all.
What I do know is that a LOT of clients LOVE the idea of a full #Quad2 Rotation in Q4. But they were feeling none of that love with their Software “Secular” Growers yesterday.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.41-1.65% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 61.63-64.00 (bullish)
REITS (VNQ) 90.80-94.44 (bullish)
Financials (XLF) 25.91-28.09 (bearish)
VIX 14.75-21.96 (bullish)
USD 97.75-99.13 (bullish)
Oil (WTI) 53.47-58.21 (bearish)
Nat Gas 2.13-2.63 (neutral)
Gold 1 (bullish)
Copper 2.50-2.66 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
