After The 4-Day Selloff

Keith McCullough

@keithmccullough

“Wild animals never kill for sport.” James Anthony Froude

Key Takeaways

  • Absolutely nothing in either the GROWTH or INFLATION data in the US has changed our Quad 4 in Q4outlook
  • When is the Fed going to wake up to the reality that they are tightening into Quad 4?
  • Stay tuned for the Fed to flinch in 2019

Macro grind

After a huge selling opportunity last week… and after the 4-day selloff in US Equity Momentum, High Beta, and Tech Stocks (all underweights or shorts in Quad 4)… mathematically speaking, what’s changed this morning?

  1. SP500: there’s less downside in the immediate-term @Hedgeye Risk Range than there was 4 days ago
  2. US DOLLAR: there’s less upside in the immediate-term @Hedgeye Risk Range than there was 4 days ago
  3. OIL: there’s less downside in the immediate-term @Hedgeye Risk Rangethan there was 4 days ago

Of course time and price changes. So does the economic data. But there is absolutely nothing in either the GROWTH or INFLATION data in the USA that has changed our Quad 4 in Q4 outlook.

Short at lower-highs and cover lower, eh.

Maybe we’ll get another one of those bounces to lower highs in the next 4 days. Since I’m in Boston for 3 days, I’d certainly appreciate a bounce before I walk into certain meetings! There’s nothing like a bounce to get people to believe a selloff is over.

Since we’re the only firm to have gone bearish on China, EM, and Europe pre going bearish on US growth and inflation, it’s important to contextualize the recent 4-day selloff in the US as only part of the 2018 Global #GrowthSlowing story.

As of this morning’s market prices, here’s a summary of some of the crashing interconnected parts:

  1. Chinese Stocks (Shanghai Comp) have crashed -26.1% since JAN
  2. South Korean Stocks (KOSPI) have crashed -20.4% since JAN
  3. Italian Stocks (MIB Index) have crashed -22.4% since MAY
  4. Greek Stocks (ATG Index) have crashed -28.9% since JAN
  5. Oil (WTI) has crashed -26.9% since OCT

And you thought having to be up +15% (from here) in the Russell 2000 to get back to break-even with where the IWM chart peaked at the end of AUG was bad? Oh boy…

Let’s forget that the NASDAQ is down -11.2% since the end of AUG for a second and ask ourselves why these macro market crashes started in either JAN or MAY of 2018?

  1. A) In JAN of 2018, the “globally synchronized recovery” peaked and rolled in rate of change terms
    B) In MAY of 2018, “global inflation” expectations peaked and rolled in rate of change terms

A good market-based proxy for inflation expectations is the CRB Commodities Index (because it has 19 commodities in it). It peaked in MAY of 2018 and has corrected almost the exact same as the NASDAQ has since (-11.1%).

Is all of this irony or interconnectedness?

Are there self-similar sets in motion as a result of growth and inflation expectations slowing?

In other real-time market and economic (data) news this morning:

  1. Germany’s preliminary y/y GDP for Q3 of 2018 slowed to +1.1% from +2.3%, so the peak of that cycle is in
  2. Eurozone Industrial Production for SEP slowed to +0.9% y/y and continues to slow alongside China’s economy
  3. US Treasuries are falling, compressing the Yield Spread (10s minus 2s) back down to +25 basis points

You’d have to work at the ECB or without an internet connection to not know that Europe is slowing at this point. But what about the fine folks at the Fed? When are they going to wake up to the reality that they are tightening into Quad 4?

The aforementioned Yield Spread is indeed what Powell calls a “market signal”, so if you think the recent 10 basis points of Yield Curve compression (since Oil crashed) is going to matter to markets, just wait until the Fed inverts the curve!

US Federal Reserve voters never kill inflation expectations for sport. They believe they save market lives. And while I believe the Powell Put is a lot lower, I also believe that they believe what they believe. So stay tuned for the Fed to flinch in 2019.

Brian Sly

Brian Sly and Company, Inc.