“Simons was convinced they could do even better.”
- Greg Zuckerman
We can always do better. Even though Jim Simon’s Axcom team posted double-digit returns in 1987 (when most money managers crashed), that’s how he thought about improving his process in 1988 and beyond.
How did he make money when the consensus crowd of stock pickers lost theirs? Prior to that, “the firm began incorporating higher dimensional kernel regression approaches, which seemed to work best for trending models…” (The Man Who Solved The Market, pg 86) across macro markets.
Got fractal dimensions in your models in 2020? Not to be confused with “meeting with the company” or a one-dimensional 50-day Moving Monkey chart, Simons didn’t do narrative chasing. He did math… and he continued to evolve his process.
Back to the Global Macro Grind…
Got a Global Macro Risk Management #process this morning? In market Signal terms, you actually needed one 2 weeks ago when I acted on the fractal dimension developing in US Equity Volatility. To contextualize it, you needed The Quad shift to #Quad4 almost 4 weeks ago too.
Welcome to Macro Monday @Hedgeye! It’s going to be a doozy.
While some are forced to freak-out, nothing in my process changes this morning. I woke up at the same time doing the same thing. Long the US Dollar, Treasuries, Gold, Utes, REITS, and Staples (XLP) against #Quad4 Shorts like Oil and High Beta Levered Small Caps? Yes, you should be.
Let’s start with what the Global Currency market did last week (i.e. it continued to signal #Quad4):
- US Dollar Index was up another +0.1% and is +1.8% in the last month alone, signaling Bullish TREND and #Quad4
- EUR/USD was +0.2% last week but is -2.1% in the last month, reiterating Bearish TREND @Hedgeye
- Yen was down -1.6% vs. USD last week and remains Bearish TREND @Hedgeye
- GBP/USD was -0.6% last week and has recently Phase Transitioned to Bearish TREND @Hedgeye
- Brazilian Real was down another -2.1% last week and is down -8.4% YTD = Bearish TREND @Hedgeye
- Chinese Yuan (CNY/USD) fell -0.6% last week to -0.9% YTD and also remains Bearish TREND @Hedgeye
As a reminder, when both the US and Chinese economies are heading into #Quad4, both the bond and currency markets figure that out before some dude with his 50DMA chart of a stock does.
While the Chinese are protecting their local equity markets, plenty of Global Equity markets have broken bad (from Bullish to Bearish @Hedgeye TREND) in the last few weeks:
- Emerging Market (MSCI) Equities dropped another -2.0% last week and are -3.8% in the last month = Bearish TREND @Hedgeye
- South Korea’s KOSPI got tagged for a -3.6% loss last week (-2.8% in the last month) moving back to Bearish TREND @Hedgeye
- Russia’s RTSI fell another -0.7% last week and is down -6.7% in the last month = Bearish TREND @Hedgeye
Yep, Russia correlated almost perfectly with our Bullish to Bearish @Hedgeye TREND pivot call on both Oil and Energy Stocks (XLE) 1-month ago. It’s a good thing our rules-based process is objective and willing to not only sell longs but turn around and short them.
Like Russian stocks, Energy Stocks (XLE) deflated another -0.8% last week and are down -6.8% in the last month.
And how about that bond market signal? Just a classic #Quad4 that was:
A) UST 2yr Yield dropped another -7 basis points last week to 1.35% and remains Bearish TREND @Hedgeye
B) UST 10yr Yield dropped another -11 basis points last week to 1.47% and is down -30 basis points in the last month alone
C) High Yield OAS Spread widened +15 basis points last week and are +39 bps wider in the last month alone
But don’t worry, the relationship between profits slowing and jobs growth is “different this time”… because the companies are bigger with better balance sheets. True, until it isn’t. Google (GOOGL) is firing people in their cloud business this morning as revs slow and opex rises.
As Real Bond Yields crash to lower-lows than when #Quad4 hit in the US economy last time (AUG of 2019, forcing the Fed to cut rates by OCT), Gold continues to get us paid. Gold was +3.9% last week and was +5.4% in the last month prior to this morning’s chart chase.
If you have friends who don’t do Dollars, Treasuries, or Gold in their retirement accounts, they can still be long Utes, REITS, and Staples – in Factor Exposure terms, those are considered LOW BETA stocks.
LOW BETA US Equity was +0.3% last week and is +1.1% in the last month vs. HIGH BETA, which was -1.5% last week and down the same in 1-month price momentum terms. If you don’t do 1-month, you should consider it this morning because both Simons and The Machine does.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND signals in brackets) are now:
UST 10yr Yield 1.37-1.57% (bearish)
UST 2yr Yield 1.24-1.41% (bearish)
SPX 3 (bullish)
RUT 1 (bearish)
Utilities (XLU) 68.43-71.61 (bullish)
REITS (VNQ) 96.13-100.65 (bullish)
Consumer Staples (XLP) 63.54-65.25 (bullish)
Shanghai Comp 2 (neutral)
Nikkei 23003-23570 (bearish)
DAX 127 (neutral)
VIX 13.35-23.99 (bullish)
USD 97.85-100.06 (bullish)
EUR/USD 1.07-1.09 (bearish)
USD/YEN 109.94-112.28 (bullish)
GBP/USD 1.28-1.30 (bearish)
Oil (WTI) 48.72-54.60 (bearish)
Nat Gas 1.72-2.00 (bearish)
Gold 1 (bullish)
Copper 2.52-2.63 (bearish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
