“Are chess experts recalling the position of each piece, or are they actually remembering patterns.”
- Anders Ericsson
In my risk management #process building journey, Herbert Simon (who wrote Models of My Life) is right at the top of my hall of fame list alongside the Benoit Mandelbrot. Ericsson did a nice job citing Simon’s research in a great book I’ve been citing as of late called Peak.
“Beginning in the early 1970s researchers sought to understand how grandmasters remember chess positions with such accuracy. The earliest studies were done by my mentor, Herb Simon…
“Years of practice make it possible for chess players to recognize patterns of chess pieces – not just their positions, but the interactions among them – at a glance… Chase and Simon called these ‘chunks’… and the important thing about them is that they are held in long term memory.” -Peak, pages 55-57
Back to the Global Macro Grind…
Welcome to another Macro Monday @Hedgeye where I measure and map last week’s Global Macro moves within the context of The Cycle’s @Hedgeye intermediate-term TREND patterns.
Our research and risk management #process helps you learn how to play chess against a bunch of Macro Tourists who are playing checkers. It’s our way of “seeing the board… which is quite different from how a novice would see the same board.” -Peak, pg 57
Let’s start with one of the grandmasters of the Global Macro Game, the Global Currency Market:
- US Dollar Index corrected -1.5% last week taking its 3-month gain back down to +0.2%
- EUR/USD had a big +1.8% Counter @Hedgeye TREND bounce last week and remains Bearish TREND
- Japanese Yen was down -0.2% vs. USD last week and remains Bullish TREND
- GBP/USD also had a +1.4% Counter @Hedgeye TREND bounce last week and remains Bearish TREND
- Brazilian Real had a +3.7% Counter @Hedgeye TREND bounce last week too (and remains Bearish TREND)
- Chinese Yuan was down -0.2% vs. USD last week, taking its 3-month loss to -2.0% = Bearish TREND @Hedgeye
When you read those 6 patterns within the interconnected Global FX pattern, what do you see? Let’s start with what you shouldn’t see – and that’s the US Dollar Index “breaking its 200 day” moving monkey!
Notwithstanding that it’s actually the Trade Weighted Dollar that matters most to our Global Quad Model (because the Bearish @Hedgeye TREND Chinese Yuan is in that), my @Hedgeye TREND support level for the USD Index = 97.74.
My @Hedgeye TREND resistance levels for the Euro and British Pound are $1.13 and $1.26, respectively. Moreover, last week’s Counter @Hedgeye TREND bounce in Brazil’s currency still has it in crash mode (down -16.2% in the last 3 months) too.
Alongside their currencies having big Counter @Hedgeye TREND bounces, Brazilian and European Stocks had big bear market bounces that I shorted on green last week too:
A) Brazil’s Bovespa was +6.4% on the week taking its Bearish @Hedgeye TREND 3-month decline to -16.1%
B) Italy’s MIB Index was +5.1% on the week taking its Bearish @Hedgeye TREND 3-month decline to -17.2%
Obviously there’s no Mnuchin, Kudlow, or CNBC pumping these Global Equity markets to Robin Hoody accounts into month-end markups, so they have to suffer their mathematical draw-down fate without some Old Wall media narrative about V-Shapes…
On that US Equity FOMO Futures front, it was a little tougher for Mnuchin and the boys to keep them green with parts of America ablaze overnight. That sadly said, here’s what I saw last week in US Equity Sector Style terms:
A) Financials (XLF) had a Counter @Hedgeye TREND bounce of +6.8% taking their 3-month decline to -12.0%
B) Industrials (XLI) had a Counter @Hedgeye TREND bounce of +6.0% taking their 3-month decline to -7.4%
C) Healthcare (XLV) was up another +3.4% last week taking its 3-month Bullish @Hedgeye TREND appreciation to +11.2%
D) Tech (XLK) was up another +1.5% last week taking its 3-month Bullish @Hedgeye TREND appreciation to +10.9%
If you didn’t know I’ve been signaling Bullish @Hedgeye TREND on Tech since the end of April, now you know (daily Risk Range product). Fundamentally, I’ve been more bullish on Healthcare which is totally cool with me. Some of us still have a free market choice!
To kick off June, both Healthcare and Tech Stocks are signaling immediate-term TRADE #overbought within their Bullish @Hedgeye TRENDs, so I’d wait for corrections towards the low-end of my @Hedgeye Risk Ranges to buy more of both.
Alongside shorting Brazilian and Italian and Spanish Stocks (when they are green towards the top-end of my Risk Ranges), I’d short more US listed Financials and Industrials against my Macro Long Book which still includes:
A) Gold which was -0.1% last week taking it’s 3-month Bullish @Hedgeye TREND appreciation to +11.1%
B) Treasuries, across The Curve, with 2yr and 10yr Yields down -45 and -50bps, respectively, in the last 3 months
Instead of having FOMO about immediate-term moving monkeys, I think you’ll enjoy your Full Cycle Investing life much more if you continue to see The Quad patterns within @Hedgeye TRENDs. That’s how you win the longer-term macro market game of chess.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.62-0.73% (bearish)
UST 2yr Yield 0.14-0.20% (bearish)
SPX 2 (bearish)
Healthcare (XLV) 98.38-103.40 (bullish)
Tech (XLK) 93.21-98.30 (bullish)
Financials (XLF) 20.46-24.37 (bearish)
Industrials (XLI) 60.04-69.81 (bearish)
VIX 26.58-35.42 (bullish)
USD 98.03-100.35 (bullish)
EUR/USD 1.08-1.11 (bearish)
USD/YEN 106.99-108.14 (bearish)
GBP/USD 1.21-1.24 (bearish)
Gold 1 (bullish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
