Last week we published the 2019 End of Year Special Edition of the Weekly Macro Themes report - a summary of some of the best, worst, and most notable charts of 2019 (and the ones to watch in 2020).
This article brings you a look at what I think is one of the most important sections of the report, simply called: "Charts That Worked".
Basically it's a summary of the best calls and charts of the year - either where the chart itself nailed the case (long/bullish or short/bearish) or where it was a major piece of the puzzle in a key investment or macro call. It's an important exercise to go through, not only from a performance standpoint, but also because it helps shed light on some of the key themes and moving parts for global markets in the year ahead.
Keep an eye out for part 2 of this article - the other side of the coin (the worst charts!), or download the report and check it out for yourself.
Format note: each chart has a comment on the chart, the date when it first appeared, and a quote from the original report which it appeared in.
1. Back at the start of the year this was one of about a dozen sentiment/flows/positioning charts that helped lay out the bullish case for equities (along with the market breadth and valuations picture). Getting equities right this year was a key call, and the charts made it possible.
(25 Jan 2019) “The Euphoriameter combines the signals from the AAII II surveys, the VIX, and the forward PE ratio - basically a combination of market based and survey-based sentiment metrics. The key point is the high contrast between the start of 2018 (euphoria) vs the start of 2019 (dysphoria).”
2. This indicator helped identify how overzealous central banks drove global equity markets into a correction (and pushed the global economy to the brink). Subsequently it helped identify the global monetary policy pivot.
(25 Jan 2019) “the elephant in the room is monetary policy. Looking only at (this) chart you could pretty much say that the global equity market correction was driven by the transition to monetary policy tightening (banks hiking rates went from the minority to the majority) ... This is the part where we get to find out how sensitive the global economy really is to tighter (less easy) monetary policy. With the growth scare, perhaps a global pause/re ease is needed.”
3. Gold (part 1): The first rumblings of the gold breakout showed up in this chart which helped identify the breach of the downtrend channel and the compression in implied volatility which preceded the surge in the gold price.
(15 Feb 2019) “the downtrend channel (from 2011), this is at risk of being breached to the upside (an upside breakout) - notably the near record-low in gold implied volatility means an upside breakout could end up being explosive since volatility crunches have a tendency to precede large moves.”
4. Gold (part 2): the gold ETF flows chart was a key element in flipping bearish on gold (sentiment, positioning, flows, valuations became stretched, overhead resistance came into focus, and real yields rebounded off a key level). At the time that was quite a tough and lonely call to make - as the best ones often are.
(6 Sep 2019) “Add to that the crowded longs and heavy ETF inflows it’s not hard to argue that gold takes a breather here at the very least. Indeed, it’s entirely possible that gold could undergo a 10-15% correction (and still be in a secular bull market).”
5. Treasuries (part 1): With the help of the PMI vs bond yield chart (and copper/gold, and copper vs CGBs) I highlighted the risk that bond yields would head lower – but it was with low conviction and I don’t think I would have imagined that they would go as low as they did. I also hedged it with my view that valuations looked expensive and sentiment quite bullish. So I give more credit to the chart than myself on this one.
(8 Feb 2019) “Given the softer DM PMIs and falling copper/gold ratio, the macro pulse at the margin says there could still be a bit further to go towards the downside for bond yields.”
6. Treasuries (part 2): “overbought & overvalued”. Though I could say that they were overvalued for much of the year, the missing link was the tactical indicators needed to round out and finesse that view. This composite global sovereign bond breadth indicator put in the most extreme overbought signal in recent history.
(9 Aug 2019) “The composite global 10-year sovereign bond breadth indicator is lighting up as extreme overbought for government bonds. Aside from being overbought, on my indicators US treasuries are now extremely overvalued. The composite valuation signal is now at a record level”
7. I turned bullish EM equities late 2018, and reaffirmed that call in January this year, a key part of this (along with cheap valuations, and supportive technical/macro indicators) was my composite sentiment indicator. At the time it was giving an extreme bearish reading – which I look at as a bullish contrarian signal. This helped in raising conviction at the bottom in absolute terms for EM equities.
(18 Jan 2019) “moving on to investor sentiment, the composite sentiment indicator has fallen further, this tends to be a contrarian bullish signal”
8. I talked about this one in the 2018 End of Year Special Edition as one to watch in 2019, but also highlighted it alongside what I thought would be a downturn in property that should have helped the case (more on that in the charts for 2020). In any case, this is one of those situations where if valuation gets cheap enough it can speak louder than the prevailing narrative/noise.
(22 Feb 2019) “looking at the chart of China A share valuations, there’s a lot of room to move before they revert to the long-term average (let alone get back to expensive)”
9. This one worked in so far as the tightening of monetary and fiscal policy indicators flagged the weakening macro pulse in China. Subsequently it also helped identify how although they had been doing some fiscal stimulus to help prevent growth from slowing too much, they had clearly been holding back on monetary stimulus.
(18 Jan 2019) “moving on to the policy puzzle for China, clearly the inarguable softening in the China macro picture incrementally puts pressure on policy makers to shift to a more forceful stimulus stance - something that has not been forthcoming yet as shown by my China stimulus indicators. Hence economic policy uncertainty is understandably at a record high for China. For me, the question of more forceful stimulus is ‘when’ not ‘if’.”
10. Back in January, USDCNY was trading around 6.8, it later peaked just below 7.2. To the extent that this chart helped flag the risk of devaluation, this chart certainly ‘worked’.
(18 Jan 2019) “one caution I would add is the USDCNY is not out of the woods Indeed, if they opt for further and more aggressive monetary stimulus this will most likely add to devaluation pressures and that’s the type of thing that would not sit well with Asian FX or EMFX (and hence remains a key downside risk to the bull case there)”
Thanks for your interest, please get in contact if you have any questions.
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