Short Equities & Credit

Welcome to The Observatory. The Observatory is how we at Prometheus monitor the evolution of both the economy and financial markets in real-time. We’ll skip the systems updates today, but here are the top developments that stand out to us:

i. Production data remained strong, but Retail Sales weakened sequentially. Industrial production for vehicles remains extremely elevated, likely corresponding with soaring prices. However, Retail demand for motor vehicles actually declined on a year-over-year basis. This divergence looks unsustainable, and we expect production to follow spending. Consistent with this expectation, our High-Frequency Impulse measures tell us that the economic trend is lower.

ii. Equity & Credit are shorts in the current environment (mostly). Here’s a sneak peek into our new Portfolio Sizing Monitor, which shows dollar allocations, assuming an un-levered, Long/Short portfolio. As we can see below, our systems are flagging Equities & Credit as shorts in the current environment. More info on this soon.

iii. Markets continue to price rising Growth & Inflation but tightening Liquidity. For those solely focused on equity markets, this may seem unlikely; however, our systems continue to show trend strength in the relative performance of Commodities versus Treasuries. Recent history may tell us that yield curve flattening plus Dollar strength is incongruent with high Commodity prices. However, with inflation becoming entrenched and the Fed hiking, we could continue to see the side-by-side strengthening of the Dollar and Commodities. Trend management remains key in current markets:

We will skip our systematic updates today, but check out our latest note on what fundamentals imply for portfolio construction. Click here. Stay nimble!

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