“We saw only a distorted, partial view of the true four dimensional universe.”
- Matthew Stanley
That was before Einstein’s epic revelations about relativity “burst into the public view in 1919.” His initial thoughts were 15 years older than that and “his theory had been complete for 4 years” prior in 1915.
And you have Old Wall friends who still think a single-factor and one-dimensional 50-day Moving Monkey average of a market’s last price was the secret to the universe and all future returns and truths? Haha!
The aforementioned quotes come from a great new book I’m reading titled Einstein’s War – How Relativity Triumphed Amid The Vicious Nationalism of World War I. There’s a lot for me to think about in terms of time, space, and our #process relative to that.
Back to the Global Macro Grind…
Welcome to Macro Monday @Hedgeye! For those of you who are new to our multi-factor, multi-duration risk management process, on the 1st day of the week we contextualize what moved in macro markets in the week prior.
Let’s start with the Global Currency market which is pricing in that the US Dollar is coming out of #Quad4 in Q3:
- US Dollar Index was down another -0.6% last week and is teetering on a Bearish @Hedgeye TREND break-down
- EUR/USD was up another +0.8% last week and moves from Bearish to Neutral @Hedgeye TREND
- Japanese Yen was +0.5% vs. USD last week and remains Neutral @Hedgeye TREND
- GBP/USD was up another +0.9% last week and remains a Bullish @Hedgeye TREND
- Canadian Dollar corrected -0.7% vs. USD last week and remains a Bullish @Hedgeye TREND
- Chinese Yuan bounced +0.4% vs. USD last week and remains a Bearish @Hedgeye TREND
US Equities liked that a lot more than the High Yield Bond market did:
A) SP500 ramped another +1.5% last week to an all-time weekly closing high of 3066
B) High Yield Spreads WIDENED +25 basis points on the week to +3.85% on HY OAS
What’s up with the divergence?
A) SPY has developed a 30-day inverse correlation to the US Dollar of -0.77 (i.e. it likes Down Dollar, for now)
B) High Yield cares that aggregate SP500 Earnings are DOWN -1.33% on a year-over-year basis
“Better than expected” earnings and “trade deal” tweets aside, evidently corporate cash flows being negative on a year-over-year basis matter to the forward outlook of the underlying credit more so than chasing the performance of stock market benchmarks.
The two best performing US Equity Sector Styles at the all-time SPY and QQQ highs last week were:
A) Healthcare Stocks (XLV) which were up +3.1% last week to +5.6% year-over-year
B) Tech Stocks (XLK) which were up +2.1% last week to +20.8% year-over-year
Reminder: both of those Sector Styles are longs in Quads 2 & 3 (even though we remain short of one Tech sub-sector, Software, for idiosyncratic reasons related to the Software Capex Bubble within The Cycle).
In terms of new positioning relative to how we were positioned during Global #Quad4, we’ve been more bullish on getting long of Commodities than any other asset class coming out of the USA’s #Quad 4 in Q3 (remember, its Q4 now and not Q3):
- CRB Commodities Index reflated another +1.1% last week and has recently broke out to Bullish @Hedgeye TREND
- Natural Gas led the Long Energy charge with a +9.8% gain last week and is also signaling Bullish @Hedgeye TREND
- Live Cattle (another new long position) reflated +3.0% last week and remains Bullish TREND @Hedgeye
Gold isn’t a commodity. It’s a currency and it continued to perform for those of you who have been long of it for the last year. Gold was up another +0.7% last week to +18.9% year-over-year as US economic data continued to come in a Quad Gold likes (i.e. #Quad3).
US Treasuries (along with the aforementioned widening in HY Spreads) thought last week was #Quad3 (i.e. not #Quad2 where Gold and Treasuries are shorts) too with the UST 10yr Yield down -8 basis points on the week to -142 basis points year-over-year.
The most interesting Global Equity markets that we’re considering on the long side right now (after being bearish on them since the end of 2017) are in Europe (stay tuned on that):
A) Spanish Stocks corrected -1.1% last week to +4.2% year-over-year and are signaling a new Bullish TREND @Hedgeye
B) South Korean stocks dropped another -0.4% last week to +5.8% year-over-year and are still Bearish TREND @Hedgeye
Nope, we’re not getting long anything related to Chinese or South Korean demand until both the economic data and market signals support those ideas. As long-time users of our time and space model know, we’ll buy anything if our #process supports it.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.66-1.86% (bearish)
UST 2yr Yield 1.49-1.67% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 8148-8429 (bullish)
REITS (VNQ) 93.18-95.70 (bullish)
Energy (XLE) 57.34-60.29 (bullish)
Shanghai Comp 2 (bearish)
DAX 121 (bullish)
VIX 12.02-15.81 (bearish)
USD 96.80-97.84 (neutral)
EUR/USD 1.10-1.12 (neutral)
GBP/USD 1.27-1.30 (bullish)
Oil (WTI) 53.89-57.25 (bullish)
Nat Gas 2.23-2.85 (bullish)
Gold 1 (bullish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
