Overboughts and Lower-Highs

“Calculus has mathematized time.”
- Steven Strogatz

Now that everyone who didn’t “see it coming” is calling this a “non-linear move” in the Bond Market, please allow me to introduce you to an education from Mr. Non-Linearity himself, Cornell’s Steven Strogatz!

If you didn’t know where I got the one-liner about calculus being the “secret to the universe”, it’s on the cover of Strogatz’ non-linear dynamics and complex systems book, Infinite Powers.

“No longer content in the static world of geometry, calculus becomes fascinated with dynamics. It asks: What are the rules of motion and change? What can we predict about the future with certainty?” (pg 123).

Back to the Global Macro Grind…

How does your risk management #process define market motion?  Surely not with a Simple Moving Monkey Average…

And how can we predict the future? We really don’t. Employing a Bayesian Inference process, we probability-weight it using a dynamic measuring and mapping process that embraces uncertainty.

I’m running short on time this morning so I’ll keep this note to 3 major factors that are jumping off the page in my notebook this morning:

1. A series of interconnected immediate-term TRADE #overbought Signals
2. A series of new Lower-High Signals, across major Asset Classes
3. A consensus linear-assumption on inflation that we continue to take the other side of

First, on the #Overbought & Lower-High Signals, here’s what I wrote to Institutional Research and Macro Pro Subscribers in this morning’s Top 3 Things note:

1. VIX – please don’t chase, especially as front-month VIX goes back towards the low-end of its refreshed 21.15-30.17 (their “feelings” will change, big time, if we see that 3-handle!); implied volatility DISCOUNTS in both SPY and Consumer Discretionary (XLY) AFTER the bounce is both typical and a contrarian signal
2. #Overboughts – lots of those across the 50 countries that I measure and map, fractally, in real-time. India (INDA) = overbought (i.e. top end of my Risk Range) in addition to the following: Singapore (EWS), Taiwan (EWT), Germany (EWG), Spain (EWP), Greece (GREK), Basic Mats (XLB), Industrials (XLI), Squeeze Retail (XRT), etc.
3. LOWER-HIGHS – are particularly important Risk Signals because they’re either upping the probability of a consolidation or signaling the beginning of the end of a @Hedgeye TRADE and/or TREND, so pay attention to these: Nikkei, Shanghai Comp, KOSPI, Semis (SMH), NASDAQ, Tech (XLK), CRB Index, Copper, Silver, EUR/USD, etc.

Again, the EOW (end of the world) probability rising (from the zero-bound since #Quad2 ramped in NOV) will surely be considered a 80-100% probability for those in the marketing business of selling fear-based subscriptions and ad spots…

And, I always have an open-mind to the beginning of a Bullish to Bearish @Hedgeye Phase Transition. Heck, China’s economy and stock market is already in one (i.e. Bearish @Hedgeye TREND Signal and #Quad3)…

But, in the USA, to get a Phase Transition that would flip my Asset Allocations (i.e. back to Long Treasuries, Gold, Utes, etc.) would be A) a series of lower-highs in my Bond Market Signals and B) a Bearish @Hedgeye TREND breakdown:

To the contrary, my Signal is signaling a series of:

A) HIGHER-lows on the UST 10yr Yield (this morning’s low-end of my Risk Range = 1.40%)… and
B) HIGHER-Cycle-highs with the top-end of my Risk Range = 1.63%

What could get bond yields to not only go there… but higher and higher from there?

A) What’s been driving them higher since November! (US Growth & Inflation Accelerating at the same time)… and
B) Consensus Linear Econs capitulating when headline inflation has a +3%-handle in the coming 3 months

If you’d like a more eloquent non-Fed & Old Wall explanation of why on #InflationAccelerating, big time, from here… here’s an excerpt from one of my long-time teammates’ (Christian Drake) notes on inflation yesterday:

“In short, this remains one of the slowest moving, most proactively predictable reflationary trains in memory.  February was the last base effect stop before trough Covid Comps begin flowing through the reported price data … and note that, as it stands, trough comps, the vaccination/reopening procession, the prospective acceleration in hiring/organic consumption capacity and the prospective deployment of accumulated excess household savings are all converging on roughly the same timeline  … carrying the potential for a combustible inflationary cocktail and a (transient) wonderland for reflation-philes.”

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

UST 10yr Yield 1.40-1.63% (bullish)
UST 2yr Yield 0.12-0.18% (bullish)
SPX 3 (bullish)
RUT 2134-2306 (bullish)
NASDAQ 12,480-13,363 (neutral)
Tech (XLK) 124.29-132.42 (neutral)
Energy (XLE) 47.94-54.81 (bullish)
Financials (XLF) 32.58-34.92 (bullish)
Utilities (XLU) 57.79-62.05 (bearish)
Gold Miners (GDX) 30.33-33.08 (bearish) 
Shanghai Comp 3 (bearish)
Nikkei 288 (bullish)
DAX 14013-14628 (bullish)
VIX 21.15-30.17 (bearish)
USD 90.10-92.60 (bearish)
EUR/USD 1.180-1.219 (bullish)
USD/YEN 106.38-109.44 (bullish)
GBP/USD 1.380-1.410 (bullish)
CAD/USD 0.78-0.80 (bullish)
USD/CHF 0.91-0.93 (bullish)
Oil (WTI) 60.33-67.21 (bullish)
Nat Gas 2.59-2.88 (neutral)
Gold 1 (bearish)
Copper 3.94-4.24 (bullish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer