This may be a little technical or overly detailed.


The take away is that I have followed this trader for a number of years and he is pretty good.


So going to 86% cash caught my eye.


You should be aware of some of his arguments.


Given tax considerations and transaction costs, this is not something that long term investors normally do.


But his arguments do support my general thesis of more down from here that I have been discussing the last 2 months or so.

Before you freak out and sell everything, know that TACRM (i.e. Tactical Asset Class Rotation Model) is just one more tool in our research process toolkit.

Still, what’s notable about TACRM’s 86% cash signal is that it dovetails with CEO Keith McCullough’s quantitative Risk Range model. Our Risk Ranges have been signaling lower highs for both domestic and global equities. Here’s another key excerpt from this week’s Market Edges:

“What’s happened in the last two weeks is that the Nasdaq and S&P 500have joined the Shanghai Comp, the Nikkei, the DAX, and the Spanish IBEX as signaling bearish trend.”

In other words, the similar signals of both TACRM and Keith’s Risk Ranges provides yet more evidence of our call to “Sell the bounce.”


Market Edges: Week of 4/8/2018

3 Important Macro Trends

We are pleased to share with you our Quarterly Macro Themes for 2Q 2018. Our three essential Macro Themes are the trends we believe will drive market returns in the coming months. Each theme forms the foundation of our current investment conclusions and will augment your own investing process. Here they are:

  1. USA: #Peak Cycle?
  2. Global #Divergences, Reiterated
  3. Dollar #Bottoming?

2Q 2018 Quarterly Macro Themes

  1. USA: #Peak Cycle?

After 6 consecutive quarters of accelerating growth and bullish quantitative signaling, our model is mapping a peak and prospective negative inflection in domestic economic growth as we move into 2H18. There’s been a shift in market and macro dynamics recently. The fundamentals, base effects and other risk management dynamics are driving our expectation for a downshift to Quads 3 (Growth slowing, Inflation accelerating) and Quad 4 (Growth and Inflation slowing) in the back half of the year. Wall Street consensus GDP estimates are now above Hedgeye forecasts for the remainder of 2018. We think consensus isn’t properly positioned for these emergent phase transitions in growth and volatility.

From my perspective, Wall Street has built in very positive numbers for the rest of the year, on both an actual and comparison basis.  My firm belief is that markets are priced on the “second differential” – change in the rate of change.  That seems to be what he is worried about.  Even if we have good number, they need to exceed the currently expected good number to move the market up.  It is not what is reported, it how what reported relates to what was expected.

  1. Global #Divergences, Reiterated

Cross-asset volatility has conspicuously emerged amid consensus calls for an ongoing “globally synchronized recovery” and an extrapolation of cycle-peak GDP growth rates in the U.S. through year-end. As such, we feel compelled to reiterate our non-consensus view that global growth momentum has broadly dissipated. The only strategist that seems to agree with our view is Mr. Market himself.

If he is right and global growth is slowing vs. the rest of the forecasting world expecting strengthening, then this would add to the risk of the market here.

  1. Dollar #Bottoming?

We have recently asked the rhetorical question, “Is the [U.S.] dollar the new VIX?” Peak dollar bearishness came midway through Q1 which was driven by carry trades and fund flows associated with the low-volatility, global growth accelerating backdrop of 2017. The U.S. Dollar index is down -11% in the past year. A reversal in the U.S. dollar continues to be a major risk to aging consensus fund flow narratives.

McCullough: So what’s going on here? We have two factors that we really care about in macro. One is growth. One is inflation. We care about the rate of change in these two things on a trending basis, so what’s going to drive the market for the next three months or more. The trend is your friend.

If you get growth and inflation accelerating at the same time, we call that Quad 2. That’s what the U.S. economy was in solidly from September through January. Now it’s subtly in Quad 2. When the U.S. economy is solidly in Quad 2 the outcomes are very obvious: Bond yields go up, Financials go up, Energy stocks go up. This outcome nailed the all-time highs. We fortunately got that right.

Quad 3, meanwhile, is very bad for stocks. That’s when U.S. growth is slowing and inflation is accelerating. We actually have a Quad 3 forecast for the third quarter of 2018. We’re currently in the second quarter so maybe Mr. Market is front-running because it’s pretty good at front-running the future.

The big risks we see:

  1. What happens if GDP growth slows from its cycle peak? We’re currently the low on Wall Street with our estimate for headline GDP in the first quarter of 2018.
  2. The other big one is profits. What happens if profits slow both absolutely and relative to expectations?
  3. And the third one is what happens if the market is breaking down in kind? When I look at my risk management signals, there are six markets that are currently signaling bearish trend in my Risk Ranges. What’s happened in the last two weeks is that the Nasdaq and S&P have joined the Shanghai Comp, the Nikkei, the DAX, the Spanish IBEX as signaling bearish trend.

So with those three things potentially happening at the same time in the coming quarters, the bear is staring you straight in the face.

All of these things add up to what we’ve been saying for some time now: Sell the bounce and we’re no longer buying the damn dip.

Brian Sly and Company, Inc.