“Don’t be a hero. Don’t have an ego. Always question yourself and your ability. Don’t ever feel that you are very good. The second you do, you are dead.” This quote is attributed to my vocational man crush, Paul Tudor Jones, writes Landon Whaley Wednesday.
PTJ is one of the global macro legends in the game, and I was recently reminded of how important it is to not be a hero or have an ego.
Our firm’s dual purpose is to help you sidestep danger and, when appropriate, position yourself for opportunities. Embedded in this purpose is a requirement to express to you the most likely outcomes in financial markets based on our process, framework, and experience. In short, our purpose is to make you aware of things before they appear in the headlines, because by the time everyone else is talking about it, the danger is already at your front door, and the opportunity has passed you by.
I’m sure those readers who are restricted to a “long-only” investment approach are frustrated by our single long position in the Asset Allocation Model and the fact that it’s the U.S. dollar. Rather than be frustrated, let my positioning in the AA Model be a clear message as to how I currently view the world.
First, I see exponentially more short opportunities right now than longs. This wasn’t the case nine months ago, but we aren’t trading 2017’s market anymore.
Here in the U.S., it’s difficult to recommend initiating new positions in broad-based U.S. sector ETFs as we undergo the first Fundamental Gravity shift in two years.
arkets get extremely noisy when passing the baton from the asset classes that were favorable in the prior Fundamental Gravity to those asset classes likely to outperform in the new one.
The current Fundamental Gravity still favors technology and consumer discretionary sectors, but the risk is heavily skewed to the downside. Within the Gravitational 15, we are able to be selective about which companies we employ to gain exposure to those two sectors. This allows us to mitigate some of the behavioral risk of getting long ETFs that are crowded and minting brand new all-time highs.
All of the tech and consumer discretionary-related ETFs are overcooked, and there is no way I would recommend wading into those waters unless we get a decent pullback. Even if you get the pullback, just one or two months of potential upside remain before growth slowing really hits the U.S. economy. There is no way to know how much upside is left for these two sectors, but it’s limited when compared to the downside potential once the new Fundamental Gravity takes hold.
In stark contrast, asset classes like utilities, U.S. Treasuries, and even consumer staples have stabilized after two years of downside and have been trending higher for a couple of months. While these markets will remain choppy and won’t really begin working until the Fundamental Gravity shift is complete, the risk reward is skewed in favor of the upside, with limited downside risk.
Gravitational Edge tells you where the puck is going, not where it has been. Sometimes, the playbook is very straightforward, like it has been here in the U.S. for the last 22 months. However, when transitions occur from one Fundamental Gravity posture to another, the playbook becomes less clear-cut. We will continue to guide you through this transition until the U.S. playbook becomes clear again. More importantly, we will continue to risk manage every position in the Asset Allocation Model and the Gravitational 15, profitable or otherwise.
In this week’s macro theme, I’ll review our longest running theme, “U.S. Growth a Go-Go,” along with the three gravities for the Nasdaq 100 ETF (QQQ). While the macro theme is chock-full of disclaimers, the tech sector should continue to outperform other U.S. equity sectors throughout the summer.
NZT 48 for “U.S. Growth a Go-Go”
Fundamentally, the U.S. economy continues to fire on all cylinders. This is in sharp contrast to the rest of the world, where growth is slowing. The U.S. economic environment remains highly conducive for being long technology stocks, at least for a few more months.
Quantitatively, it doesn’t get more bullish than what we are seeing right now from QQQ.
Behaviorally, everyone and their mother is long U.S. technology right now and adding to their exposure. We can’t underscore enough how critical it is to wait for a pullback before initiating new positions. The current behavioral risk of a drawdown is extremely high.
We share detailed entry and exit guidelines with our research clients including specific price targets for risk and profit taking. In addition, we send out real-time alerts whenever we initiate or close a position in our Asset Allocation model.
If you’d like to receive the details for this long QQQ trade and be notified when we are initiating the position, please email us at ClientServices@whaleyglobalresearch.com. We will also provide you with a free four-week trial of our research offering, which consists of two weekly reports: Gravitational Edge and The 358.
Fundamental Gravity says what?
Two chief variables impact the risk and return of asset prices: economic conditions and how central banks respond to those conditions. Together, these variables drive what we call an economy’s Fundamental Gravity.
On the growth side of the equation, the most recent ISM Survey showed an acceleration of three critical components in the month of May: first, ISM new orders accelerated from April to 63.7; second, ISM Services PMI bounced to 58.60 after slowing in the previous two months; and third, ISM backlogs spiked to a brand new all-time high.
In addition, auto sales continue to accelerate on a year-over-year basis. This is critical because historically, the annual growth of auto sales from one month to the next has typically been a good barometer of the economy’s overall direction.
On the consumer side of the growth equation, both income and spending are still improving sequentially thanks to the tightness in the labor market. That said, higher gas prices are squeezing the U.S. savings rate like a vice grip, and the positive impact of recent tax cuts on the savings rate is slowly dissipating. These bearish aspects of the consumer picture need to be monitored but won’t impact asset prices over the next two months.
The Fundamental Gravity bottom line is the U.S. economy continues to fire on all cylinders, which is in sharp contrast to the rest of the world, where growth is slowing. The U.S. economic environment remains highly conducive for being long technology stocks, at least for a few more months.
Quantitative Gravity says what?
As a quick reminder, the Quantitative Gravity component of our Gravitational Framework is not technical analysis, which is ineffective and misleading. Rather, we use quantitative measures that are based on the reality that financial markets are a nonlinear, chaotic system.
We’ve identified four primary quantitative dimensions of financial markets that affect price movement: energy (trend), force (momentum), rate of force (buying pressure), and a market’s irregularity.
Social is our measure of a market’s current energy (or trend). QQQ’s Social reading indicates that it’s in full party mode. Remember, markets don’t go straight up or down. The tech space has been on an absolute tear, so it’s critical to wait for a pullback before initiating new positions.
Momo is our measure of the amount of force behind the market’s current state. QQQ’s Momo has been building bullishly since May 5 and is growing stronger each trading day.
Barometric is our measure of the rate of force behind the current MOMO. QQQ’s Barometric tells us that buyers have been in complete control of this market since May 7 and that buying pressure continues to build.
Topo, which measures the probability of a drawdown, confirms the other bullish signals as the probability of a drawdown in QQQ over the next 10 trading days is extremely low.
Most investors are hyper-focused on price action. Unfortunately, price is nothing more than the current point where there are equal parts of disagreement on value and agreement on price.
If you’re new to our Quantitative Gravity framework, it’s important to note that the four quantitative dimensions of a market that we monitor typically move ahead of price. In other words, price is the last aspect of a financial market to move, quantitatively speaking. However, price is an important factor, and my bullish thesis for U.S. technology equities will remain intact, as long as QQQ trades above $170.35.
The Quantitative Gravity bottom line is that it doesn’t get more bullish than what we are currently seeing from QQQ. There’s only one way to trade this market right now: from the long side.
Behavioral Gravity says what?
Behavioral Gravity allows us to evaluate investors’ perception of this market and how that perception changes and shifts over time.
Retail investors have added approximately $1.7B to QQQ so far this year. More importantly, they’ve added $1.4B of that money during the last month, alongside QQQ’s recent ascent to new all-time highs.
The Behavioral Gravity bottom line is that everyone and their mother is long U.S. technology right now and adding to their exposure. We can’t underscore enough how critical it is to wait for a pullback before initiating new positions. The current behavioral risk of a drawdown is extremely high.
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