“Preaching the gospel of E-M was an ongoing and ever-changing process.”
-Robert Coram

Got a risk management #process that absorbs “shocks” like this morning’s Oil move is going to give the Global Economy? We do. Not unlike John Boyd’s evolutionary E-M #process, our Quads & Signaling #process is designed to provide patience when people panic.

In its earliest years of application, US Military Strategist John Boyd said “he had to make people understand that E-M was not just best way, but the only way to measure air-to-air performance in an airplane… even though both the Air Force and industry were enamored with E-M, not everyone yet grasped the full dimensions of what it could accomplish. It was new and different. And anything new and different is feared by a bureaucracy.” (Boyd, pg 203)

While some simply appreciate our 4 Quadrant #FullCycleInvesting process, I find many of our power users trying to front-run it. That’s cool. But, especially if you don’t see every critical move in our predictive tracking algos in real-time, I humbly submit you might want to consider when we decide to make major asset allocation pivots before you do.

Will Oil Up = #Quad2 or #Quad3? - 06.29.2018 Q3 slowing cartoon

Back to the Global Macro Grind…

On a Friday after you could have bought boatloads of battle-tested US Treasuries on sale, oh baby is it going to be a fun Macro Monday @Hedgeye! Nothing about our decision making #process changes this morning. Data and market PRICE/VOLUME/VOLATILITY will.

On the heels of some of the worst Chinese economic data in 17 years, let’s start with the Global Currency market:

  1. US Dollar Index had a Counter @Hedgeye TREND correction week of -0.5% but remains Bullish TREND on the Saudi news
  2. EUR/USD had a Counter@Hedgeye TREND bounce of +0.4% last week to -3.4% YTD and remains Bearish TREND
  3. Yen corrected -1.1% vs. USD last week to +1.4% YTD and remains well bid on the Saudi news and Bullish TREND
  4. GBP/USD had a big +1.8% Counter @Hedgeye TREND bounce last week but remains Bearish @Hedgeye TREND
  5. Russian Ruble was +2.0% vs. USD last week to +6.0% year-over-year and remains Bullish TREND @Hedgeye  
  6. CNY/USD had a Counter @Hedgeye TREND bounce of +0.5% last week to -3.3% year-over-year and remains Bearish TREND

That’s right, Chinese Yuan (CNY/USD) continues to signal Bearish TREND @Hedgeye inasmuch as the Hang Seng, Copper, and Chinese economic data for AUG (just reported) do. What kind of a “deal” are people expecting to be in Q3 #EarningsSeason, btw?

If you want me to sell every #Quad4 asset allocation in my personal accounts for a #Quad2 week (Down Dollar, Up Rates, Up Everything Risk), I’m going to need to see A) a Bearish TREND break-down in USD and B) a Bullish TREND breakout in Commodities (CRB Index). 

Neither A) nor B) did that last week but there was a heck of a rally in the reflationary “risk on” trades that seemed to be hoping for a #Quad2 rather than a Stagflationary #Quad3 US economic outcome:

A) Commodities (CRB Index) had a Counter @Hedgeye TREND bounce of +1.3% to -8.7% year-over-year = Bearish TREND
B) Oil (WTI) was down -3.0% last week to -17.1% year-over-year (not a typo), so it has plenty to prove this AM on the news
C) Gold corrected -1.1% last week to +20.6% year-over-year and remains Bullish TREND @Hedgeye  

That’s right, if the market is “moving to #Quad2”, not only will USD break-down for real, but Real Yields will break-out to the upside making Gold a new Bearish @Hedgeye TREND short. That ain’t happening on the Game of Drones news this AM either.

On the Bond Yield bit (just a bit of a move!), wow were some people panicking on Friday. There are Counter @Hedgeye TREND bounces in things, but this one in US Treasury Yields was epic:

A) UST 2yr Yield bounced +26 basis points last week to 1.80% and -96 basis points year-over-year
B) UST 10yr Yield bounced +34 basis points last week to 1.90% and -107 basis points year-over-year

And, right after the short-term panic peaked, UST 10yr Yield drops -8 basis points to 1.82% this AM on the Saudi news…

That bond market reaction stands in sharp contrast to other legit #Quad2 economic breakouts (like in 2017) when bond yields broke out on clean cut US #GrowthAccelerating data.

Then there was the epic move in “stocks”… which was much more obvious in the Sector and Factor Exposures than it was in the index:

  1. Energy Stocks (XLE) were +3.5% on the week to -17.3% year-over-year, but still Bearish @Hedgeye TREND  
  2. Financials (XLF) were +3.8% on the week to +1.6% year-over-year, but still signaling Bearish @Hedgeye TREND
  3. REITS (VNQ) were -1.9% on the week to +9.5% year-over-year and still signaling BULLISH @Hedgeye TREND  

Using the year-over-year return reflects the #FullCycleInvestor’s return, don’t forget. That’s because the US economic TRIPLE PEAK in GROWTH, INFLATION, and PROFITS was in Q3 of 2018. We made that call on September 27th, 2018. #Timestamped

Yep, when we make the call on moving to the next Quad, we’ll make that call crystal clear. On this newsy morning, it’s not clear whether the US economy is going to be in Quad 2 or Quad 3 in Q4. It’s not clear that #Quad4 in Q3 is fully “priced in” yet either.

Preaching the gospel of The Quads and market signals is an ongoing and ever-changing #process, indeed.

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

UST 10yr Yield 1.36-1.93% (bearish)
UST 2yr Yield 1.38-1.83% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 7 (neutral)
REITS (VNQ) 91.26-94.21 (bullish)
Financials (XLF) 26.31-28.87 (bearish)
Nikkei 205 (bearish)
DAX 113 (bearish)
VIX 13.50-20.15 (neutral)
USD 97.52-99.01 (bullish)
EUR/USD 1.09-1.11 (bearish)
USD/YEN 105.75-108.60 (bearish)
GBP/USD 1.21-1.25 (bearish)
Oil (WTI) 53.65-60.33 (bearish)
Gold 1 (bullish)
Copper 2.52-2.70 (bearish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer

Will Oil Up = #Quad2 or #Quad3? - Chart of the Day