“Sometimes the only way to get your counterpart to listen is by forcing them into a No.”
- Chris Voss
Did the title of this note trigger you? If I say there is “no” rotation inside the US Equity Market, you know that I know that’s not true, right? You also know that “rotating” out of US Tech didn’t work…
I spend a considerable amount of time trying to convince a growing audience of people that there’s a better way to invest than what they were doing prior to becoming data-driven and Macro Aware. I need to, as Voss says, “negotiate in their world.”
In doing so, I should always remember that “persuasion is not about how bright or smooth or forceful you are. It’s about the other party convincing themselves that the solution you want is their own idea.” -Never Split The Difference, pg 94
Back to the Global Macro Grind…
It’s actually really easy to have someone convince themselves that they are right when they either save or make money for the right reasons. It’s a lot harder to try to keep convincing them of something when they don’t.
“Rotating out of Tech didn’t work.” Whether you look at this on a daily, weekly, or monthly basis, that’s empirically true:
- Yesterday Tech (XLK) was +0.3% vs. SPY -0.2%
- Last week Tech (XLK) was +2.8% vs. SPY +1.7%
- In the last month Tech (XLK) is +7.5% vs. Utes and Staples -2% and +5%, respectively
Therefore, it’s also true that if you “rotated” out of big Full Cycle Investing Asset Allocations that are RATE SENSITIVE to #InflationAccelerating in #Quad2 and into both cyclical (inflation) and organic growth (Tech) you get how to rotate.
Whereas, if you stayed overweight, gross, and/or net long:
A) Long-term Treasuries (TLT)
B) Gold (GLD) and Gold Miners (GDX)
C) Utes (XLU), Staples (XLP), and Housing (ITB)
You got rotated, right?
See, I’m already getting you to say yes. Why? Because you know that in #Quad2 (i.e. when both GROWTH & INFLATION are accelerating, at the same time) nominal and real rates rise. During #Quad4 (deflation) they fall.
Once a Full Cycle Investor has convinced themselves of these back-tested economic and market realities, they have a solution to simplify the complex to either their loved ones or their clients. If they want to explain their returns, that is…
In the aforementioned example, did I cherry pick the best performing part of “Tech”?
See, I got you to say no again! Being long the Factor Exposures that perform best in #Quad2 would have made a portfolio with these attributes much stronger:
A) Small Cap Tech
B) High Beta Tech
C) High Short Interest Tech
Yes.
Now, with the NASDAQ closing at yet another all-time closing high of 12,519 yesterday, this is not to say that either it (Large Cap Growth) or Small Cap Tech isn’t going to register immediate-term TRADE #overbought signals. No, no, no! They will.
But, yes, if you want to keep pace with “the market” during #Quad2, you know you’re going to be buying the damn dip in anything growth that you like, which included cyclical (inflation) growth like Energy (XLE).
Ha, Energy (XLE, XOP, AMLP) isn’t “growth”, right? Be careful on answering that one with a no too quickly. When it comes to year-over-year ROC (rate of change) Earnings Growth, both Basic Materials (XLB) and Energy are going to rip in 1H of 2021!
Here’s another question you might say yes then no to: Is consensus already positioned too bullish on the NASDAQ?
A) Prior to the all-time closing high, there was a net SHORT position of -20,081 contracts in the NASDAQ
B) From a non-commercial CFTC futures & options positioning perspective that’s a z-score of -0.82x
But, but, you read these Old Wall Talking Points over here and that over there… and you thought… no, you didn’t. Yes. You are smarter than that. You look at net positioning and futures & options pricing to make you Macro Aware, right?
Since you analyze markets fractally, you’d never look at a market price without considering both its realized and implied volatility within its Volatility Regime and Implied Quad, would you? Nope on that too, I bet.
Here’s another one I’m betting you already saw looking at yesterday’s vol of vol data:
A) #NazVol (NASDAQ Volatility) continues to break-down and remains Bearish TREND @Hedgeye
B) Treasury Bond Volatility (MOVE Index) continues to threaten a big Bullish TREND breakout
‘Oh yeah, I saw that, Mucker.’ Awesome. Now you’re seeing what you taught yourself to look for in an Asset Class – falling volatility is where assets flow whereas rising volatility is where funds flow out of. Keep rotating on that.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.84-1.00% (bullish)
SPX 3 (bullish)
RUT 1 (bullish)
NASDAQ 11,980-12,609 (bullish)
Tech (XLK) 121.64-127.54 (bullish)
Energy (XLE) 36.30-41.48 (bullish)
Utilities (XLU) 62.01-64.68 (bearish)
Gold Miners (GDX) 33.02-37.12 (bearish)
VIX 19.42-23.76 (bearish)
USD 90.15-92.12 (bearish)
EUR/USD 1.192-1.223 (bullish)
Oil (WTI) 43.70-46.69 (bullish)
Gold 1 (bearish)
Copper 3.31-3.61 (bullish)
MSFT 211-217 (bullish)
AAPL 115-128 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
