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Time to reduce exposure to (+) G (+) I?
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: The trend of (+) G (+) I has reaffirmed itself in markets, with a strong performance in commodities and equities yesterday. Indeed, most equities, barring communications, have positive expected values during this regime, however going into today, we would suggest caution on the long side. Equities are beginning to look extended relative to our gauges of expected returns, which is typically a time to reduce exposure. Conversely, the risk-reward setup was once again strong for communications shorts. A similar picture emerges in commodities, with commodities currently offering more opportunities to reduce exposure than to add. Equity and commodity moves are now well supported by our momentum measures at this junction. Still, our volatility estimates tell us this is a time to be trimming gains predominantly in both equities and commodities. To summarize our systems' current assessment: Our Momentum Scores show that the bounce in US Equities has extended itself across durations, leading to a Momentum Score of 79%. Typically a trend-following asset, Commodities have a dominant Momentum Score of 100%. Treasuries remain lackluster, with their 6% Momentum Score indicating worse than average returns over the next week. Our upgraded Market Regime Monitors continue to confirm the dominance of (+) G (+) I. Consequently, our expected return and risk analysis tell us that the best opportunities are Long: Bonds, Cotton, Lean Hogs, Cattle, Sugar, and Short: Communications. However, our Risk Management Monitors indicate that we can ADD to LONG: Sugar and SHORT: Communications. We can REDUCE LONG: Cotton, Lean Hogs, and Cattle. Our Expected Return Strategy has exited these positions and remains LONG: Sugar & SHORT: Communications.
Macro: Yesterday's ADP report disappointed consensus estimates significantly, keeping the pressure on Economic Momentum and economic growth. Markets will now be looking to Nonfarm Payrolls to confirm this data. Since 2019, ADP has signaled the direction of NFP for 99% of months (it missed once); therefore, we know that the NFP data is likely to be weaker this week; the question will be how much weaker relative to reassessed expectations. To summarize our systems' current assessment: Despite yesterday's hit to expectations from the ADP Employment data, Economic Momentum remains around the middling zone, at 47.3% and our GDP Nowcast sits at 3%. The deceleration in growth is extremely close on the forecast horizon; our systems expect that growth will begin its descent in earnest in March. Our Inflation Nowcasts shows resilience in inflation levels potentially pushing its deceleration to April.
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.
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