Discover more from Prometheus Research
Yesterday on Twitter, we shared a teaser of our new research product: The Observatory. This product is how we systematically track the evolution of financial markets and the US economy in real-time. The response to our teaser was fantastic, telling us that there is indeed a vast audience for sophisticated systematic macro analysis and trading tools. Here’s the tweet we sent out:
Seeing the strength of this response, 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!
Without further ado, let’s dive into what our systems are telling us:
Markets: Equities continued to confirm a correction yesterday, with most sectors down once again as well. However, commodities continue to be substantial value adds to portfolio construction, with our preferred tilts generally up over the last week. On the flip side, bonds continued to sell-off, while silver continued to rally—both contrary to our signals. However, we have mean reversion elements built into our systems, and these factors are significant for bonds and silver (both boasting a 60% hit ratio). Therefore, given our systematic outlook for an eventual transition to (-) G (-) I, we think that having both long bonds and short silver, which are both fundamentally (-) G (-) I trades, will be value accretive over the next few months. To summarize our systems’ current assessment: Our Market Regime Signal is telling us the market regime is (+) G (+) I after pricing in (+) G (-) I until recently. Our portfolio construction principles lead our systems to be Long: Bonds, Corn, Cotton, Lean Hogs, Cattle, OJ, Soybeans, & Wheat, and Short: Silver. Our Risk Management Monitors indicate that we can ADD to LONG: Bonds and SHORT: Silver. We can REDUCE our LONG: Corn, Cotton, Lean Hogs, Cattle, OJ, Soybeans & Wheat.
Macro: As we can see above, US economic momentum is heading into more dangerous territory; today, it sits at 49.5%. Given that consensus estimates of future growth tend to be linear rather than cyclical, we think there is a significant potential for economic momentum to significantly slow if our systematic growth and inflation forecasts are correct. Today, we will receive incremental information in the form of Initial & Continuing Claims, Existing Home Sales, and Market PMI’s. Additionally, we will see index data out of the Philadelphia and Chicago Fed. We don’t focus on predicting all data on a print-by-print basis; however, our systems generally imply that the trend will continue to decelerate for most major economic data on a cyclical basis. To summarize our systems assessment: 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 attached.
Click here for the full version: https://tinyurl.com/Observatory-beta1