“Only those who will risk going too far can possibly figure out how far one can go.”
- T.S. Eliot
Unlike Eliot, my job isn’t to wax poetically. While I enjoy writing, my job isn’t to entertain you either. It’s to try to succinctly explain what I’m doing across my Full Investing Cycle portfolio of options and why.
That starts with The Quads. It’s also path dependent on my TRADE, TREND, and TAIL Signals. When both agree (like Gold, Treasuries, and Utilities will, again, today) that’s good. When one Quad starts to argue with my TREND Signal, that’s when things get interesting.
Is the US macro market starting to front-run our Late Cycle #Quad4 in Q2 outlook? Maybe. The aforementioned long positions love #Quad4. So does a #StrongDollar. Commodities, Oil, and Energy Stocks do not.
Back to the Global Macro Grind…
It’s Macro Monday @Hedgeye! Whether people are panicking or complacent, we don’t change what we do based on emotion and/or market risks moving at a faster rate. We take a deep breath… and we measure and map all of the economic data and market signals.
Let’s start with the Global Currency market:
- US Dollar Index was up +0.25% last week and is now +0.2% in the last month moving back to Neutral TREND @Hedgeye
- EUR/USD corrected -0.6% last week and has also moved back to Neutral TREND @Hedgeye
- Yen was +0.8% vs. USD last week but remains Bearish TREND @Hedgeye
- GBP/USD was up another +0.4% last week and remains Bullish TREND @Hedgeye, +1.0% in the last month
- Canadian Dollar was -0.6% vs. USD last week moving back to Neutral TREND @Hedgeye
- Chinese Yuan corrected -0.6% vs. USD last week but is +1.4% in the last month and remains Bullish TREND @Hedgeye
From a @Hedgeye TREND Signal perspective, When something moves from Bullish to Neutral (or Bearish) TREND, that may or may not be the beginning of a new Phase Transition. It’s either a short-term head-fake or the beginning of a broader TRENDING move.
A good example of that is what just happened to the Commodities market:
- CRB Commodities Index was down -3.9% last week going from Bullish to Neutral TREND @Hedgeye
- Oil (WTI) deflated -7.5% last week and is currently below @Hedgeye TREND Signal Support of $52.85/barrel
- Copper deflated -5.7% last week, snapping @Hedgeye TREND support of $2.79/lb
At the same time, Gold ramped another +0.8% last week and is +4.5% in the last month alone, adding to its epic Full Cycle Investing gains that started 16 months ago (pounding “stocks”) when the US Economic Cycle peaked.
Perpetuating that Gold move was a continued plunge in both Real Growth expectations and Real Yields:
A) UST 2yr Yield dropped another -6 basis points last week and remains Bearish TREND @Hedgeye
B) UST 10yr Yield dropped another -15 basis points last week and remains Bearish TREND @Hedgeye
That A/B Test wasn’t “new” on last week’s Global Virus concerns. That move in Real Yields fortified itself as US economic data for December #slowed at a faster rate.
You mean a 127-month low in the ISM (when it was supposed to “bounce”) mattered? Yep. That’s why 3 of the top 4 Equity Sector Longs paid out last week. If it’s not #Quad4 yet, it’s still back to back #Quad3 in the USA:
- Utilities (XLU) were in beast mode +2.4% last week and are +6.7% in the last month
- REITS (VNQ) were up another +0.8% last week and are +4.5% in the last month
- Tech (XLK) was +0.3% last week and is +6.8% in the last month
- Energy (XLE) got tagged for a -4.2% loss last week and is down -8.6% in the last month
#Wrong on short USD and Oil/Energy last week would be an understatement. It’s a good thing I had the rest of my Full Investing Cycle portfolio on alongside that weakness. I’ll give it a few more days but have no problem tossing Oil/Energy to the curb.
I am perma bullish of nothing.
Thankfully, I have #Quad3 Shorts too. Being short SMALL CAP, as a Factor Exposure, has been awesome for the last 16 months. Last week was especially ugly for the Russell 2000:
A) Russell (IWM) was down another -2.2% last week (vs. SPY -1.0%) and has been down in 4 of the last 5 weeks
B) Russell (IWM) is still down -4.5% from where it made its Full Investing Cycle peak back in Q3 of 2018
With Asia mostly closed overnight (Nikkei tagged for a -2% loss), US Equity Futures are down -50 plus handles here. Yes, in the very short-term, that’s freakout/panic selling. In the intermediate-term, maybe the market has it right. Quad 3 to Quad 3 isn’t good either!
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.61-1.81% (bearish)
UST 2yr Yield 1.41-1.56% (bearish)
SPX 3 (bullish)
RUT 1 (bearish)
Utilities (XLU) 65.18-69.25 (bullish)
REITS (VNQ) 92.46-96.56 (bullish)
Energy (XLE) 55.27-60.80 (bullish)
Tech (XLK) 93.61-98.60 (bullish)
Shanghai Comp 2 (bearish)
Nikkei 23154-24410 (neutral)
DAX 138 (bullish)
VIX 11.56-15.95 (neutral)
USD 96.88-97.99 (neutral)
EUR/USD 1.09-1.12 (neutral)
USD/YEN 108.71-110.09 (bullish)
GBP/USD 1.29-1.31 (bullish)
Oil (WTI) 51.76-58.70 (neutral)
Gold 1 (bullish)
Copper 2.63-2.79 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
