The Observatory
Short some stocks?
The Observatory is how we systematically track the evolution of financial markets and the US economy in real-time. Due to the strong demand for the product, we will start sharing the beta version of The Observatory (click to download) as we finalize its designs. This will offer a high-frequency resource to those using our systematic macro approach, allowing them to “Observe” the macroeconomy through our quantitative lenses. We will soon be launching the product officially, i.e., with explainer materials and a standardized format. And don’t worry, it’s all still free! Also, make sure to follow us on Twitter for timely updates:
Without further ado, let’s dive into what our systems are telling us:
Markets: After a brief period of relief yesterday, equities resumed their descent. However, our bias towards commodities and bonds was appropriate given the reversal we saw in equities towards the close. Yesterday's cross-asset class moves triggered our first equity short for the year in the Communications sector. We think this signal is important to note, and if the current market regime dynamics continue to hold, it will likely be portfolio accretive. The most significant risk market participants need to manage today is downside equity risk; therefore, having minimally or inversely correlated to equity beta is particularly welcome in weeks like these. To summarize our systems' current assessment: Our Market Regime Signal has decidedly moved towards pricing (+) G (+) I, i.e., rising growth and inflation, market regime. Furthermore, (-) G (+) I continued to build support this week, with the 1-month probability rising. After our Market Regime Signal transition to (+) G (+) I after pricing in (+) G (-) I, the menu of options from a return-on-risk perspective has gotten significantly wider. Both on the long and short sides, emerging opportunities could be value additive. Consequently, our expected return and risk analysis tell us that the best opportunities are Long: Bonds, Cotton, Lean Hogs, Cattle, Sugar, and Short: Communications. Our Risk Management Monitors tell us we can ADD on weakness to LONG: Bonds. We can REDUCE on strength our LONG: Cotton, Lean Hogs, Cattle, & Sugar and SHORT: Communications.
Macro: Yesterday's economic data added to a growing but slowing US economy narrative. Initial and continuing jobless claims were weaker than expected, as were existing home sales. The cumulation of this week's economic data resulted in economic momentum at 49% for the week, i.e., economic data generally surprised to the downside; there is strong potential for this to continue as we get closer to March. To summarize our systems' current assessment: The latest economic data that feed our GDP near-casting estimates US GDP growth at approximately 3.2%, a deceleration from the earlier estimate of 3.4%. Our systems imply this descent will continue, i.e. (-) G (-) I, and thereby drag on economic momentum. Our systematic forecasts for our Growth and Inflation Indices point to a turning point in March. Our Liquidity Monitor shows our private and public liquidity measures have declined throughout 2021 due to the leading nature of liquidity; we expect these moves to show in macro and markets in H1 2021. We have received come confirmation in the form of lower economic surprise data.
The future is dynamic, and our systems adjust as new information is available. Our bias is to allocate for the existing regime while trying to peek around the corner to what the future may hold. Finally, we optimize these views to minimize portfolio risk, resulting in our trading signals. We show all this in the document below.
Click here to enter The Observatory: https://tinyurl.com/Observatory-beta2