United States

Underweight Last Monday we executed our S&P homebuilders downgrade alert and reduced allocation in this consumer discretionary sub-group to below benchmark. While the media has been cheering homebuilder-related data recently, the reality is that the data has been fully priced in (top & bottom panels). We expect rates to continue climbing higher, which means that the catalyst that let homebuilders run wild in the first place will be heavily weighing on the index. In more detail, the middle panel of the chart shows that the ten-year US Treasury yield (shown inverted) has likely sealed the verdict for US homebuilders when looking at the sub-group in absolute terms, which makes relative outperformance a tall order. Bottom Line: We reiterate our recent underweight in the S&P homebuilding index; the position is already up 9% since the November 23 inception. The ticker symbols for the stocks in the index are: BLBG: S5HOME – LEN, PHM, DHI, NVR.  

Dr. Copper has gone ballistic of late, breaking out to multi-year highs. While there is an element of speculative fervor, global growth is ascending and China’s demand for commodities remains insatiable (top panel). Copper’s recent spike signals that EUR/USD will likely decisively break above the 1.20 ceiling (bottom panel), a message that China’s immense easing corroborates as we highlighted last week. The Fed was adamant in debasing the US dollar as a way to reflate not only the US but also the global economy as we highlighted early on in the recovery in early-May. Now the Fed has passed the baton to investors and USD bears are squarely in control. The implication is that a positive feedback loop of a falling currency and rising global growth is great news for commodity producers. We expect a V-shaped recovery in the cyclicals/defensives profits on the back of the budding economic recovery the world over (middle panel). Bottom Line: Continue to prefer deep cyclicals at the expense of defensives.

The SPX has breathed a sigh of relief and has slingshot higher in November to the tune of 10%, reversing two months of losses and springing back to all-time highs. Equity flows have been spiking and investor bullishness is near three year highs according to the bull/bear ratio from the American Association of Individual Investors. This worry-free market with nearly every asset class on “risk on” mode last month (second panel) is worrisome to us and eerily reminiscent of January 2018. As a reminder, back then investors priced in the Christmas 2017 fiscal easing package in a mere 20 trading days in January 2018, that morphed into the “Volmageddon” 10% drawdown in February 2018. Today, the SPX recovery has been even more violent than in early 2018 and everyone seems to be on the same side of the boat risking capsizing. This complacency is showing up in an intraday VIX print below 20 last week, and a stampede into low quality highly-indebted stocks (not shown). An element of a short squeeze is also at play (third panel). While most investors are neglecting the COVID-19 cases news and the Google trend mobility data as has been the case since the March lows, the bond market is sending a different message (bottom panel). If the next 25bps move in the 10-year Treasury yield is to the downside, then the risk is that in the near-term the SPX may retest the recent lows as the rotation trade would go on hiatus. Bottom Line: We remain cyclically and structurally bullish the SPX but in the near-term stocks are fully priced and have likely stolen some of next year’s return.