the cascade – pinecone macro research january 14th, 2018€¦ · this period is about laying low...

THE CASCADE – PINECONE MACRO RESEARCH JANUARY 14TH, 2018

www.pineconemacro.com @pineconemacro [email protected] 1

The Macro Doldrums

This week includes a very robust charts of the week section so I will keep my focus area very short this week. This week we find ourselves in the doldrums. Many markets and charts are at a crossroads where their trend is to be determined in the price action in the days ahead. As you will see, the dollar is right at its crossroads, US rates are at make or break levels, US stocks are entering their red zone as spreads and cyclicals test important areas etc. Sometimes you have to step back and have less of a firm opinion and let the markets come to you and that is how I feel this week. I am trimming up positions and taking down exposures especially to currency positions as everything appears to be up in the air right now. This period is about laying low and waiting for prevailing macro winds to pick up – which they will soon. One thing that I have noticed and I write about this week is just how important of a driver oil has been in the macro universe recently. It is vital to keep a close eye on the oil market, no matter what you trade. If you show me the oil chart over the past couple of months – I could use it to tell you what almost every market has done.



US Stocks

I have been surprised by the bullish nature of credit spreads and cyclicals. While stocks are just now reaching my red zone – as you will see – spreads and the Bristlecone Index have ripped higher without even slowing down.

$SPX – S&P 500 – Weekly

We are just now getting to the red zone I have marked since it was support. A lot of technicians are outlining this general area as an important area – and despite the current consensus – this area is vital. Considering the fact that spreads and cyclicals are performing well – if we could close a week above this zone – I would look hard at switching to bullish. Despite that view, I expect stocks to turn down in this area and once again threaten the channel as well as perhaps the green zone. Remember that the green zone worked when pessimism was at its maximum. I am staying in the bear market camp for now.



Credit Spreads - $SHY/$HYG - Weekly

Last week I expected spreads to bounce out of the green zone (specifically the line I drew on the bottom of the zone) but spreads RIPPED tighter in an impressive fashion. My redzone I drew beforehand turned out to be a great zone and one that I underestimated. As we head into this week we must turn our attention to the top of the rectangle that was so prominent for the past two years. Will we bounce off of the top if we get there? Stay tuned. One thing to note about spreads and cyclicals is they have been ripping higher along with oil – stocks/spreads/cyclicals all bottomed when oil did. Oil is really a vital macro driver right now and it is sitting right at its 200W. As you navigate the markets this week – keep a close eye on oil.



Bristlecone Index – Cyclicals vs Defensives - Weekly

Cyclicals have been ripping back to their 200W and the top of their rectangle that goes back to March of 2015. If you want to see cyclicals and spreads deteriorate before you raise cash or short stocks (assuming you bought when I advised in the green zone) – you will have to wait because they have been very strong ever since oil bottomed.



Dollar

$DXY – Daily

The dollar is above its 200D but now below (at) its trendline and important horizontal resistance. What happens here will be crucial. Last week I said I was ignoring the dollar until it settled outside of 95.50-97.50 and we are still in that range. I have been a dollar bull since Moby Dick was a minnow, but I could easily see this pullback accelerating. Whether it is a positioning washout, or the liquidity being provided by the US treasury, thanks to yet another debt ceiling issue on the horizon, or Powell showing some chinks in the QT armor, there is some legitimate short term catalysts for the dollar to sell off. I normally have a very firm position on the dollar but for now I have personally greatly pulled back my positioning (only long the dollar vs the AUD) and suggest some hedging if you are also have long exposure.



What has shifted my thoughts on the dollar short term other than the debt ceiling and QT flip flopping? $EMLC – Emerging Market Local Currency Bond ETF – Weekly

EM local currency bonds ripped higher out of an ascending triangle and it was one of many inputs that made me realize I should take seriously the chances of a dollar washout (if not bear) coming.



$EEM – Emerging Markets ETF – Monthly

As of now emerging markets are looking okay. EM is once again bouncing off of the top of the old DTL which dates back to 2007. On top of that, EM is bouncing off of a demand level and breaking above a new DTL. This all adds up to the possibility of a rip higher short term in EM. I am starting to think that the liquidity situation regarding the US treasury shorter term could lead to a dollar washout and a rip in EM assets before the trend continues. As I mentioned, I have dialed back outright long dollar trades – but a good way to try to hedge long dollar trades is to perhaps buy calls on EM or your favorite EM country.



Rates

2yr Bond Yield

The 2yr is right at my level and I am close to cutting this trade. With spreads tightening as oil has ripped higher it is no surprise that yields have moved higher. The 5yr is currently within its supply zone and I am also considering cutting that trade soon if we settle above the zone.



10yr Bond Yield – Daily

Last week I said the best entry to get long bonds would be on the 10 year and so far my supply zone has held and yields are just below that zone after it rejected yields from moving higher. The 30yr is range bound and my 2-30 steepener is now up by 14bps.



Currency of the Week

USDCNH - Weekly

The surge in the yuan caught me off guard this past week. I am still quite bearish on a fundamental basis but again, could see a move higher shorter term. I drew out my next line which is at about 6.71 where I would likely take a stab at being short the yuan. Despite not taking the pain on this trade, I have endured it being short the Aussie. Below is the monthly of AUDUSD.



AUDUSD – Monthly

I presented this chart to you a few weeks ago when price was testing the bottom side of the UTL. Since then, we turned much lower and washed out the same night as the yen spiked. Price put in a massive monthly wick on the candle and is now above a crucial horizontal level which has been tested multiple times since 2015. The Aussie could possibly rally into both a DTL and horizontal resistance soon, where I would press my shorts.



Commodity of the Week

Crude Oil Futures (Continuous) – Weekly

Crude has been quite the macro bellwether for the past few weeks and months. Oil started collapsing on October 3rd – same as stocks. Oil bottomed on Christmas – same as stocks and spreads & cyclicals. As stocks enter their red zone – oil tests its 200W, as well as an important horizontal level. Keep a close eye on oil to try and figure out what comes next for the rest of the macro landscape. I will keep you informed.



Stock of the Week

GHYG – Global High Yield ETF - Weekly

Global high yield has also been ripping higher with oil – not just US HY. We have now created a pretty well defined rectangle that will be worth watching as we move forward.



Ratio of the Week

$DBC/$TLT – Commodities vs Treasuries - Weekly

Commodities were saved versus bonds on the same bottom as oil/cyclicals/spreads etc. This ratio is right at its 200W and warrants keeping a close eye on it. Like copper to gold, commodities vs bonds is a good way of keeping an eye on how inflationary the economy is.



Dumpster Fire of the Week $EWY – South Korea ETF – Weekly

South Korean stocks are starting to test their UTL on a weekly basis and the rallies are not looking strong. We have the 200W as well as a horizontal level just above us right now. I am looking for this trendline to break down if we continue to see weakening in Asia and in the global economy.



Charts of the Week

If you have been struggling to figure out why everything but cash sucked in 2018…^^^

It is getting ugly in Germany…



French Consumer Sentiment

If consumption continues to follow sentiment – Europe is in big trouble. So what is behind the struggles in Europe?...



Back to Germany – if industrial production follows new orders (it always does) – well uh yeah…

Last bearish Europe chart I promise.



In a recent Cascade I went over the most recent TBAC presentation and I highlighted that the executive summary said bid-to-cover ratios were stable, which I took exception to.

Well – we are continuing to witness supply and demand issues in treasury auctions.



Japanese Wage Growth

Not bad for a place paying 0% on a 10yr bond.

One of the reasons I turned bullish on bonds and referred to headline inflation as dead for now – is the fact that China is exporting deflation. That is becoming clearer by the day and this week’s PPI number was a big miss.



Speaking of China’s PPI – check out how it tends to correlate with Industrial profits. China better hope this breaks down – but I doubt it will. As I wrote last week, I expect the slowdown in China and the underestimation of it to be the story of 2019.

What about export prices??



Rate Hikes and Crude Prices

Oil has been telling you what to expect of inflation and monetary policy.

I just found this chart very interesting and some of the data really flies against the way some countries trade and certainly the narratives built around many countries.



I have three charts relating to the labor market via Mr. Rosenberg of Gluskin Sheff that are pretty rough at the moment – continue to watch jobs closely.



Just another way to look at CB balance sheets – and it is worth showing twice because this is the most important chart in the world right now. If CBs are backing off what is happening to M1 growth?...



India Industrial Production

Ouch.

Tweet of the Week

I could not agree more with EV Macro on the yuan. I admit – I did NOT see this move in CNH coming and am lucky that I avoided it (although AUDUSD punched me in the face). With that said – it is time to look for good long entries on the USDCNH pair as well as the AUDUSD pair in my opinion.



Read of the Week: Kevin Muir’s article about Jay Powell is great and not just because he mentioned my thoughts. Also, if you are new and do not have Volume 1, I covered Powell’s views on financial stability in depth, so shoot me and email and I will send it to you. I figure most of you have read my piece on how I think oil could end the long term debt cycle in the years ahead – but if you have not – check it out. Listen of the Week: I found this to be an interesting listen via the Australian Strategic Policy Institute – it includes some great discussion on The Quad. Watch of the Week: Real Vision spoke with Jonathan Tepper (Variant Perception) about his new book The Myth of Capitalism and the discussion is fantastic and very important from a macro standpoint in my opinion. Jonathan approaches this subject with such a sober and curious nature and the depth of his research makes me never want to write a book – because matching his level feels daunting. Great stuff.

I am grateful for your time and your readership. Thank you. Your Macro Analyst, -Chase Taylor

Quote of the Week “Remember how long you’ve been putting this off, how many extensions the gods gave you, and you didn’t use them. At some point you have to recognize what world it is that you belong to; what power rules it and from what source you spring; that there is a limit to the time assigned to you, and if you don’t use it to free yourself it will be gone and will never return.”

― Marcus Aurelius

https://www.themacrotourist.com/posts/2019/01/08/fed/




http://www.pineconemacro.com/uploads/2/8/3/3/28331049/pinecone_macro_special_report_-_oil_and_the_super_cycle.pdf

http://www.pineconemacro.com/uploads/2/8/3/3/28331049/pinecone_macro_special_report_-_oil_and_the_super_cycle.pdf

https://soundcloud.com/user-415599049/policy-guns-money-episode-10

https://soundcloud.com/user-415599049/policy-guns-money-episode-10

https://www.realvision.com/tv/shows/the-interview/videos/whats-wrong-with-capitalism







Disclosure: Pinecone Macro Research, LLC is an independent research firm. Pinecone Macro’s letters are based upon information gathered from various sources believed to be reliable but are not guaranteed as to accuracy or completeness. There are risks in investing. Any individual report is not all-inclusive and does not contain all of the information that you may desire in making an investment decision. You must conduct and rely on your own evaluation of any potential investment and the terms of its offering, including the merits and risks involved in making a decision to invest. The information in this letter is not intended to be, and shall not constitute, an offer to sell or a solicitation of an offer to buy any security or investment product or service. The information in this report is subject to change without notice, and Pinecone Macro assumes no responsibility to update the information contained in this report. There is risk in trading markets. Pinecone Macro is not an investment advisor. My letters are based upon information gathered from various sources and believed to be reliable, but are not guaranteed as to accuracy and completeness. The ideas and trades I share are my own and are for informational and educational purposes only and should not be construed as investment advice. Accordingly, you should not rely solely on the information in making any investment. You should always check with your licensed financial advisor to determine the suitability of any investments.

the cascade – pinecone macro research january 14th, 2018€¦ · this period is about laying low...

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