“If you hoard material possessions, they will rob you of your soul.”
- Pope Francis
After one of the worst performance days (and weeks) of my career, I watched The Two Popes this weekend. I guess I needed to hear people in higher places than me ask for redemption.
However the powers that be in the US government were able to misstate Friday’s jobs report (May unemployment rate was actually 16.3%, not 13.3%, because 4.7M workers were misclassified as employed, but are really unemployed!)…
I sincerely hope that people on Wall Street don’t parade around like they’re killing it. The Jobless Cycle in America is real. The depths of #Quad4 year-over-year profit declines for Q2 are going to be reported in July.
Back to the Global Macro Grind…
No matter where I go, here I am, writing to you on another Macro Monday @Hedgeye.
For those of you who are new to my Full Investing Cycle #process, I’m constantly considering multiple-factors in my Asset Allocation process: The Quads (Growth and Inflation), The Profit Cycle, and The Market Cycle (multi-factor Signals).
When making big moves that I can ride alongside The Cycle’s sine curve, I think about all 3 of those major factors on an intermediate-term TREND duration (3 months or more). Sometimes that means I miss 1-2 week and 1-2 month TRADES.
While I could make our process shorter-term and focus on the implied hindsight of every immediate-term @Hedgeye TRADE (3 weeks or less), I think that would confuse people looking to get the Full Investing Cycle right.
That said, on the 1st day of every week, I consider all weekly moves within the context of intermediate-term TREND Asset Allocations, Sector Styles, and Factor Exposures.
So let’s get on with that and focus on last week’s critical Phase Transition (i.e. when my market signal suggests we’re moving from one TREND to another) in the Global Currency market:
A) US Dollar Index dropped -1.4% last week, breaking bad to Bearish TREND
B) EUR/USD ramped +1.7% last week moving it from Bearish to Neutral TREND
C) Japanese Yen dropped another -1.6% vs. USD last week and remains Bearish TREND
D) GBP/USD ramped +2.6% last week moving it from Bearish to Neutral TREND
Since my quant signals don’t undergo a Phase Transition unless the volatility of the asset’s price does, these often take long Cycle Time to play out. FX Volatility dropped -4.2% last week, taking its 1-month momentum to -17.6%.
That was enough to break what’s been Deep #Quad4 US Dollar support. As a reminder, the only plain vanilla Quad that backtests as USD Bullish is #Quad4. Our recent analysis suggests a Deep #Quad3 could be USD bullish as well.
The other big move in volatility last week came in the Treasury market where US Treasury Bond Volatility (MOVE Index) moved +20.2% higher week-over-week. Was that an investable and TRENDING move?
A) No. Inclusive of that volatility cluster, Treasury Bond Volatility is still down -36.1% in the last 3 months
B) If it turns out to be the beginning of a new TREND, I’ll be wrong in positioning for #Quad3 in Q3
What are the TRADE and TREND signal levels for the UST 10yr Yield:
A) Immediate-term TRADE resistance = 0.92%
B) Intermediate-term TREND resistance = 1.43%
Put simply, if an immediate-term TRADE breakout > 0.92% were to occur, not only could it be one heck of a Counter @Hedgeye TREND move towards 1.43%, but The Fed will look like they’ve lost control of the bond market.
Regardless, I built the multi-duration signaling process to protect myself (don’t forget, I run all of my long-term family and retirement account capital using my TREND duration), so my simple risk management rules from here are:
A) Wait & watch to confirm if it’s a breakout > 0.92% or another head-fake
B) If it’s a real move, take down my gross exposure to something like TLT
If it’s a head-fake, like Gold’s correction was on Friday, then I buy more TLT. That’s the other big thing about The Market Cycle and my signaling process – there’s a singularity to it. I consider every move within the broader macro market move.
Since Gold isn’t as susceptible to misstated jobs reports and perma bull narratives on economic recoveries, it saw no change in its volatility signal last week. On a -3.9% correction for Gold last week, Gold Volatility (GVZ) barely budged.
That’s why I bought more Gold on sale on Friday instead of buying more TLT. It didn’t have a cluster of volatility to put me on pause. That’s the 17th time in a row I’ve been right in Real-Time Alerts buying GLD.
Given the move in the MOVE and the UST 10yr Yield being +24 basis points on the week, it was the 1st time I was really wrong on my timing in shorting both the Financials (XLF) and Junk Bonds (JNK).
Financials (XLF) got squeezed for a +12.1% weekly gain taking their 3-month loss to -0.8%. High Yield OAS Spread dropped -101 basis points last week … but they are +42 basis points wider in the last 3 months. So I’ll be shorting more XLF and JNK.
What I won’t be shorting more of for #Quad3 in Q3 are Commodities. With Down Dollar, the CRB Commodities Index reflated +5.1% last week to -14.4% in the last 3 months.
I was waiting for USD to break bad to Bearish TREND to pull forward my getting long of the “Flation” part of #Quad3 Stagflation. Now that I have that, I’ll look for more ways to be long of #InflationAccelerating alongside TIPs.
Other #Quad3 Longs that just recently started signaling Bullish @Hedgeye TREND include Utilities (XLU) and REITS (XLRE). Tech (XLK) is a #Quad3 long and has been signaling Bullish @Hedgeye TREND since the end of April.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.55-0.93% (bearish)
UST 2yr Yield 0.12-0.23% (bearish)
SPX 2 (bullish)
RUT 1 (bearish)
Healthcare (XLV) 99.33-104.32 (bullish)
Tech (XLK) 95.15-102.29 (bullish)
Utilities (XLU) 56.07-62.81 (bullish)
Financials (XLF) 22.20-26.75 (bearish)
REITS (XLRE) 33.19-37.84 (bullish)
VIX 23.18-33.56 (bearish)
USD 96.19-99.60 (bearish)
EUR/USD 1.09-1.13 (neutral)
USD/YEN 106.92-109.91 (bullish)
GBP/USD 1.22-1.27 (neutral)
Oil (WTI) 31.30-40.84 (bearish)
Gold 1 (bullish)
Copper 2.36-2.58 (bearish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
