Prime Trade Ideas: Holding the Line

We consolidated our favourite biases into one, easy-to-read, weekly report! Please find the original pieces linked throughout and a summary table at the end of the document. Reach out to us on Slack or email the author with any questions about the content.

An Update on Our Trade Ideas

We summarise our latest trade ideas here with links to the original analysis.

• We reiterate underweight Consumer Discretionary.The consumer discretionary sector remains about 15% overvalued based on the current earnings outlook. Investors can hold the consumer discretionary sector via the XLY ETF.
• We remain bearish bitcoin. MVRV valuations suggest bitcoin could reach $24,000, but room exists for a more extreme pitstop at either $16,000 or $8,250.
• Fundamentals point to GBP/USD weakness. Three-month GBP/USD put spreads could be attractive as double-digit UK inflation, a too-cautious Bank of England, and global risk aversion point to further GBP weakness.
• Momentum models remain bearish S&P500. Momentum models are broadly bearish on equities and bonds, though bullish on the FTSE-100.

Bilal’s Asset Allocation Update

Find Bilal’s latest asset allocation biases here. Note, since its release, Bilal has changed his bias to a neutral weighting in crypto.

• Our core investment view remains the same. Markets are fragile, preservation of capital is paramount, and cash is king. Overall, our bias is to be underweight equities and bonds, overweight cash and commodities, and neutral crypto.
• This is a transition year, ending the era of low interest rates since the Global Financial Crisis. So, while equity markets bounced after the Fed reassured with a 50bps hike, rather than 75bps, we should not lose sight of the amount of rate hikes to come. The Fed could raise policy rates to the 5.25% peak of the 2000s or even 8%.
• In this environment, we are likely to face constant sharp market moves. The latest was the Chinese yuan plunging, but other markets are likely to follow in the months ahead. We are tracking extreme market moves on a weekly basis.

John Tierney’s Equity ETF Update

Find John’s ETF biases here and his latest update below. Alternatively, his full list of biases are in the table below.

• Underweight consumer discretionary (XLY): Since the beginning of April, the S&P 500 consumer discretionary sector is down 18% and has underperformed the SPX by 11.3%. During that time, it has gone from being 50% to 20% overvalued based on forward earnings. We see continued downside for this sector on an absolute basis and relative to SPX.
• Overweight homebuilders (XHB): Homebuilders are among the better performers in the consumer discretionary sector. Unlike previous cycles when homebuilders went into downturns with large overbuilt inventories, this time there is a significant housing shortage in the US. Homebuilders have bulging backlogs, not bulging inventories. They can continue to build through a downturn and still make money.
• Last week, John updated his equity sector biases on retail, energy, materials, and homebuilders. He suggested to be neutral retail (XRT), overweight energy (XOP, OIH), underweight materials (XLB), and overweight homebuilders (XHB).

Cryptocurrency Models

Find our latest bitcoin signals here and our latest ethereum signals here.

• Bearish bitcoin: The macro backdrop remains bearish.Bitcoin and equity correlation remains high as the probability of recession within the next 12 months is back up to 50%. Meanwhile there is just one bullish signal versus four bearish signals and one neutral signal. We remain bearish bitcoin.
• Bearish ethereum: Our latest macro signals suggest a bearish environment for ethereum. As did our on-chain/flow signals. Overall, we retained our net-bearish bias on ethereum.

FX and Rates

Find our latest discretionary macro biases in collaboration with SGX here and our latest FX options insights in collaboration with CME here.

• Bullish a GBP/USD put spread: Three-month GBP/USD put spreads could be attractive as double-digit UK inflation, a too-cautious Bank of England, and global risk aversion point to further GBP weakness.
• Our update with SGX comes next Thursday. Our last report was bullish USD/CNH, USD/TWD, and INR/TWD; and neutral KRW and SGD.

Momentum Models

Find the latest Momentum Model signals in collaboration with TMX here.

• Bearish S&P/TSX 60 Index: Our one- and three-month CTA lookback momentum models are net-bearish on the S&P/TSX 60 Index.
• Bearish Canada 5-Year and 10-Year: Our one-, three-, and 12-month CTA lookback momentum models are all bearish on the Canada five- and 10-year.
• Net-bearish global equities: Our best-performing CTA lookback momentum models are bearish on the S&P500, Nikkei, and DAX. In contrast, the best-performing CTA lookback momentum models are bullish on the FTSE-100.
• Bearish global rates: Our best-performing CTA lookback momentum models are bearish on the US five- and 10-year, Japanese Government Bonds, Bunds, and Long Gilts.

Ben Ford is a Researcher at Macro Hive. Ben studied BSc Financial Mathematics at Cardiff University and MSc Finance at Cass Business School, his dissertations were on the tails of GARCH volatility models, and foreign exchange investment strategies during crises, respectively.