Do You Believe #Quad4?

“Just because you believe something doesn’t make it true.”
- David Goggins

On a personal development level, as Goggins went on to remind me in the introduction of a great book a friend of mine gave me for the holidays, Can’t Hurt Me, “denial is the ultimate comfort zone.” Across my personal portfolios, not so much.

From an economic and market perspective, what do you believe?

God willing, with two feet on the floor at the top of every risk management morning, what I believe is that I have a #process that can and will change my beliefs. Every economic data point matters inasmuch as every market move does.

Back to the Global Macro Grind…

Welcome to another 2020 Macro Monday @Hedgeye! Post a big Superbowl win for Mahomes and his Kansas City Chiefs, it’s time to wake-up and get after some week-over-week market data.

Let’s start with the Global Currency market:

1. US Dollar Index corrected -0.5% last week towards the low-end of its @Hedgeye Risk Range
2. EUR/USD bounced +0.6% last week towards the top-end of its @Hedgeye Risk Range
3. Yen was up +0.8% vs. USD last week and remains Neutral TREND @Hedgeye  
4. GBP/USD popped +1.0% last week and remains Bullish TREND @Hedgeye  
5. Brazilian Real dropped -2.3% vs. USD last week, moving back to Bearish TREND @Hedgeye  
6. Russian Ruble corrected -3.0% vs. USD last week, moving from Bullish to Neutral TREND @Hedgeye  

If I’m right, and the Global Macro market believes that both USA and China are re-entering #Quad4 in Q2 of 2020, we’re going to see more major EM currency breakdowns like we saw in Brazil last week.

Remember, the market believes going to US Cash and/or Long the US Dollar is the right asset allocation decision in #Quad4.

The Commodities market, broadly, believed in #Quad4 Deflation risk last week (so I believed the market and got out):

1. CRB Commodities Index deflated -3.1% last week and has gone back to Bearish TREND @Hedgeye from Bullish prior
2. Oil (WTI) deflated another -4.9% last week and confirmed a Bullish to Bearish TREND Phase Transition (breakdown)
3. Copper got smoked for a -6.2% deflation last week and remains Bearish TREND @Hedgeye  

While it might be hard for some to believe, the best #BeanDeal in human history didn’t equate to a hill of beans in Soybean inflation terms. Soybeans deflated another -3.3% last week and, alongside the entire Ag complex, remains Bearish TREND.

There was broad-based #Quad4 Deflation of Global Equity prices too:

1. Hong Kong (Hang Seng) deflated -5.8% last week and remains Bearish TREND @Hedgeye  
2. Emerging Markets (MSCI Index) dropped -5.1% last week moving back to Bearish TREND @Hedgeye  
3. London (FTSE) dropped -4.0% last week moving back to Bearish TREND @Hedgeye 

So, mid-week, it ended up being a good risk management decision to believe what the market believed as I sold my Emerging Markets (EEM) position in addition to bagging my Energy and Oil longs for #Quad4 Deflation.

What did the market believe you should be Long in #Quad4 last week:

1. Long Treasuries, across The Curve, with both the UST 2 and 10yr Yield down -18 basis points last week
2. Long Gold which was up another +0.6% last week taking its Full Cycle Investing return (from Q3 of 2018) to +32.1%
3. Long Utilities (XLU) which were +0.9% last week taking their Full Cycle Investing return to +34.6%

Do you believe in Full Cycle Investing? Since I made that up, you’d have to believe me and my teammates on that. I only believe in that because both the economic data and market returns do.

If you’re up +32-35% in Gold and/or Utilities since The US Cycle peaked in Q3 of 2018, you believe Old Wall draw-downs of your hard earned capital can’t hurt all of your capital too.

The alternative belief system was to buy something like “Small Caps” which were not only down -2.9% last week (Russell 2000) but are down for 5 of the last 6 weeks and down -7.2% over the same Full Cycle Investing period (Q318-Q120).

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

UST 10yr Yield 1.48-1.74% (bearish)
UST 2yr Yield 1.31-1.49% (bearish)
SPX 3 (bullish)
RUT 1 (bearish)
Utilities (XLU) 66.35-69.69 (bullish)
Energy (XLE) 52.92-55.99 (bearish)
Shanghai Comp 2 (bearish)
Nikkei 226 (bearish)
VIX 14.03-19.95 (bullish)
USD 97.01-98.11 (bullish)
EUR/USD 1.09-1.11 (bearish)
USD/YEN 108.19-110.10 (neutral)
GBP/USD 1.29-1.32 (bullish)
Oil (WTI) 50.01-56.82 (bearish)
Gold 1 (bullish)
Copper 2.45-2.65 (bearish) 

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer