It's Still #Quad4

“There were good reasons to be skeptical of the computer people.”
- Greg Zuckerman

There were good reasons to be skeptical of people chasing cyclical “stocks” and super #LateCycle credit on Trump tweets into 2019 year-end too. While many will come up with new narratives this morning, don’t forget where all of this credit and equity risk came from.

At 0% SP500 (pre-virus) earnings growth in Q4 of 2019, it’s a good thing there wasn’t a bubble in corporate credit.

Back to the Global Macro Grind…

Welcome to Macro Monday @Hedgeye. While emotions will change this morning, our risk management #process does not. On the 1^st day of every week we measure and map last week’s macro moves within the context of intermediate-term @Hedgeye TRENDs.

Let’s start with the Global Currency market which is effectively begging for a Fed bailout this morning (Dollar Down):

1. USD Dollar Index broke @Hedgeye TREND support of $96.03 (USD Index) with a -2.2% drop last week
2. EUR/USD popped +2.3% last week, stopping us out on the short side as it moved back to Neutral @Hedgeye TREND
3. Yen ramped another +2.5% last week and remains a “safe-haven” Bullish @Hedgeye TREND at +4.3% in the last month
4. GBP/USD bounced +1.8% to $1.30 with @Hedgeye TREND at $1.31
5. Brazilian Real fell another -3.4% vs. USD last week, is -7.5% in the last month and remains Bearish TREND @Hedgeye 
6. Mexican Peso dropped another -2.5% vs. USD last week, is -7.2% in the last month and remains Bearish TREND too 

Will the US Dollar break down slowly? Could it hold? Don’t forget that the Fed was the most incrementally aggressive actor in the Currency War (with its 50 basis point panic cut last week). The Europeans go next this week with the ECB meeting on Thursday.

Down Dollar still meant Down Commodities:

1. Commodities (CRB Index) deflated another -2.3% last week to -8.6% in the last month and remain Bearish TREND @Hedgeye 
2. Oil (WTI) crashing this morning but deflated -7.8% last week too; classic #Quad4 Bearish @Hedgeye TREND
3. Lumber deflated -6.6%; Sugar deflated -7.9% - both good examples of #Quad3 Reflation Longs turned into #Quad4 Shorts

In terms of US “stocks”, last week was still #Quad4:

1. Energy Stocks (XLE) continued to crash, down another -6.1% (down -21.8% in the last month alone)
2. Financials (XLF) have moved into crash mode, -3.9% last week and -17.7% in the last month
3. Utilities (XLU) and Consumer Staples were +7.9% and +6.1%, respectively on the week

As a reminder, alongside Tech Stocks (XLK) and Industrials (XLI), Energy and Financials = #Quad4 Sector Style Shorts, whereas Utes and Staples are #Quad4 Longs. If you’re running a generalist long/short fund, you should be crushing it with your Sector setups right now.

The other long/short setup that crushes it in #Quad4 is Long Treasuries (across the curve) vs. Short #LateCycle Credit:

1. UST 2yr yield crashed -41 basis points last week and remains Bearish TREND @Hedgeye 
2. UST 10yr yield crashed -39 basis points last week and remains Bearish TREND @Hedgeye  
3. High Yield OAS Spread widened another +50 basis points last week to +550 over

Can High Yield Spreads widen to 600-800 “over”? Obviously, yes. This Credit move at this stage of The Cycle is not different this time, especially as US Corporate Profit Growth continues to slow to NEGATIVE on a year-over-year basis.

That’s why other valuable assets to a Full Investing Cycle #Quad4 portfolio are:

1. QUALITY (balance sheets)
2. LIQUIDITY (large cap)
3. LOW BETA

You’ll see those types of portfolios crush LEVERED SMALL CAP portfolios with HIGH BETAs again today. HIGH BETA, as a Factor Exposure, lost -7.0% of its value with the SP500 “up” +0.6% last week (with Utes and Staples carrying the “up” part of the move).

If I was selling all bounces in Tech, High Beta, etc. at VIX > 31, I think you get the drill at VIX > 41.

Immediate-term @Hedgeye Risk Range with TREND signal in brackets:

UST 10yr Yield 0.49-1.10% (bearish)
UST 2yr Yield 0.27-0.75% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 8 (bearish)
Utilities (XLU) 61.30-70.22 (bullish)
Consumer Staples (XLP) 57.26-64.03 (neutral)
Tech (XLK) 84.08-94.71 (bearish)
Nikkei 196 (bearish)
DAX 105 (bearish)
VIX 25.53-52.56 (bullish)
USD 94.78-97.96 (neutral)
EUR/USD 1.09-1.14 (neutral)
USD/YEN 101.83-109.05 (bearish)
GBP/USD 1.27-1.31 (neutral)
Oil (WTI) 30.30-45.49 (bearish)
Nat Gas 1.55-1.90 (bearish)
Gold 1 (bullish)
Copper 2.40-2.60 (bearish)

Best of luck out there this week,

KM

Keith R. McCullough
Chief Executive Officer