“Local volatility is indeed an average over instantaneous volatilities.”
Key Takeaways
- Is Wall Street betting that the latest COVID #acceleration is going to result in more US Dollar Devaluation (moarrr Fed Cowbell on its birthday today in 1914 btw) by both the Fed & Fiscal Folks? Big time.
- Don’t tell the Fed, but a breakout in Treasury Bond Volatility (MOVE Index) with the UST 10yr Yield > 1.01% @Hedgeye TREND resistance will make for an even more fun Global #Quad2 flow story!
The big picture
With SPY blasting to all-time highs this morning, would you like me to immerse you in a riveting breakdown of Bloomberg’s Bruno Dupire’s volatility equations? I hope not.
I get it. What most people want is a “call” on markets. If you want one of those, give Morgan Stanley a buzz. Three weeks ago when stocks were down, hard, and the VIX was at 40, their guy was looking for a “10% correction”…
Now, after an epic 2-week ramp, he’s looking for new all-time highs. Thanks for coming out. At this Independent Research firm, I timestamp every signal and macro market pivot I make in real-time, daily. Timing matters.
Macro grind
Welcome to what should be a fun Macro Monday @Hedgeye. How can one be bearish when volatility adjusted risk is “on” and then bullish when Instantaneous Volatility breaks down? It’s actually pretty easy. Just do what volatility is doing.
Let’s start with one of the most causal factors for Global Macro markets – Currencies:
- US Dollar Index bounce off its #oversold signal early last week and is breaking down again this AM = Bearish TREND
- EUR/USD was -0.3% last week but remains Bullish on both my TRADE and TREND durations
- Japanese Yen corrected -1.2% vs. USD last week but also remains Bullish TRADE and TREND @Hedgeye
- GBP/USD was up another +0.3% last week and remains Bullish TRADE and TREND as well
- South Korean Won was +1.3% last week vs. USD and has broken out +3.7% in the last month alone
- Argentine Peso was down another -1.6% last week vs. and is down -3.1% in the last month = Bearish TREND
Is Wall Street betting that the latest COVID #acceleration is going to result in more US Dollar Devaluation (moarrr Fed Cowbell on its birthday today in 1914 btw) by both the Fed & Fiscal Folks? Big time.
While that’s become both a perpetual bet and Fed “put”, the real big macro thing going on out there in the world is that macro markets are discounting a pending Global #Quad2 in Q1 of 2021.
When was the last time we had Dollar Down + a Globally Synchronized #Quad2? A long time ago. That’s probably why the Nikkei ramped another +2.1% overnight after ramping another +4.4% last week. What else is moving, faster, as vol falls?
A) Russian Stocks are up another +2.0% this morning after a +4.2% week
B) Oil is inflating another +2.1% this morning after a +8.1% inflation back to Bullish @Hedgeye TREND last week
C) Nigerian Stocks were up +13.0% last week to +23.6% in the last month!
Your MS guys and gals don’t have you long Nigeria (NGE)? Seriously? What is wrong with these people?
I can tell you why I’m not long of Nigeria yet (might buy that puppy in the PA). Darius doesn’t have it on slide 24 of your Real-Time Refreshed Global Macro Risk Monitor. He must be slacking or something. ha
As you can see in that chart: The Quads Are Global! No one sees it like DD does as a sea of green #Quad2s pending.
Back to last week’s US Equity Volatility breakdown… when you weaponize a VIX drop of -9% A) through @Hedgeye TREND Signal support and B) a +8.1% Oil Inflation:
A) Energy Stocks (XLE) ramped +17.1% on the week, signaling Bullish @Hedgeye TREND for the 1st time in forever
B) Lumber inflated another +10.2% last week, taking its 1-month inflation momentum to +29.2%!
No, those aren’t typos. They’re two obvious places to be long of #InflationAccelerating while Ye Olde Wall and Fed Economists tell you there’s “no inflation.”
BREAKING: New York Fed's Williams says inflation will be lower than the bank wants in the next few years – FT
Bahaha! Those guys are funny. While I don’t expect them to have Stochastic Volatility models for things like Corn and Soybeans (which both inflated another +1.4% and +4.2% last week, respectively), eventually someone will send them some price charts.
They may read the cover of Old Wall Barron’s too and see that Small Caps are ripping. My Russell 2000 signal is a relatively new Bullish @Hedgeye TREND and last week’s Russell Volatility (RVX) breakdown below 31 is bullish for those stocks too.
The biggest question about #Quad2 inflation accelerating that remains is when the Bond Market says we’re good to go on that. Last week’s +8 basis point pop in the UST 10yr Yield keeps it Bullish TRADE but still (barely) Bearish @Hedgeye TREND.
Don’t tell the Fed, but a breakout in Treasury Bond Volatility (MOVE Index) with the UST 10yr Yield > 1.01% @Hedgeye TREND resistance will make for an even more fun Global #Quad2 flow story!
Our levels
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.76-1.00% (neutral)
SPX 3385-3644 (bullish)
RUT 1584-1784 (bullish)
NASDAQ 11,239-12,115 (bullish)
Energy (XLE) 30.94-35.96 (bullish)
Shanghai Comp 3255-3398 (bullish)
Nikkei 24502-26098 (bullish)
VIX 19.25-34.01 (bearish)
USD 91.99-93.37(bearish)
Oil (WTI) 36.98-42.77 (bullish)
Copper 3.09-3.26 (bullish)
Bitcoin 15,109-16,939 (bullish)
Best of luck out there this week,
KM
Keith R. McCullough
Chief Executive Officer
