“Don’t quit. Suffer now and live the rest of your life as a champion.”
- Muhammad Ali
For those of you suffering with the S&P500 down -1% from its all-time high, hang in there. When we get there, life in #Quad4 gets a lot worse!
I spent the last few days in Ali’s home town of Louisville, Kentucky. If you haven’t made that trip, I highly recommend it (especially if you’re into bourbon and horses).
In addition to celebrating Ali’s championship life, I was able to spend some quality time with two Triple Crown Champions: Justify and American Pharaoh. Caring for those stallions requires some serious patience and process!
Back to the Global Macro Grind…
If we’ve observed anything in the last year of risk managing The Cycle, it’s that both Wall and Main Street “investors” are short of both patience and process:
A) On May 12th, front-month fear closed at 27.59 on the VIX
B) Yesterday, the VIX closed -32% lower at 18.84
The “why” on that had nothing to do with the market quitting on #Quad2. All the while the US Dollar was breaking down and everything from Commodities to European Equity markets were making new #Quad2 Cycle Highs.
So what is it that plenty of market participants are suffering from? A: performance problems.
It’s one thing to suffer from voluntary and healthy personal sacrifice (like Ali did). In this profession, it’s entirely another for people to work as hard as they do and play The Game from behind. It just wears on people.
But that doesn’t change The Score and/or The Cycle.
From a Vol of Vol perspective, here’s how my patient process scores US Equity Volatility this AM:
- VIX = Bearish TREND with immediate-term downside towards 16.30
- VXN (NASDAQ Volatility) = Bearish TREND with immediate-term downside towards 21.06
- RVX (Russell Volatility) = Bearish TREND with immediate-term downside towards 22.95
What’s been interestingly but not surprisingly consistent in 2021 is that every (monthly at this point) Volatility Spike we’ve experienced in US Equities has resulted in a lower-high at the top-end of my Volatility Risk Ranges.
I always get asked about when volatility is going to breakout for real. I rarely get asked about when it’s going to hit new Cycle Lows. Why? A: human nature. Consensus remains net SHORT of SPY, IWM, etc. don’t forget.
What I’ll get asked most about at the end of May is somewhat like what I’d get asked about at the end of March. You’ll recall that many Macro Tourists thought the US Dollar was “breaking out” back then.
Now the US Dollar is testing new Cycle Lows.
Today it’s going to be all about Bond Yields “breaking down” and Gold “breaking out.” I have @Hedgeye TREND signals for both of those and neither of them are implying what single-factor (price momentum) chartists are “seeing”:
A) UST 10yr Yield’s @Hedgeye TREND support level = 1.28%
B) Gold’s @Hedgeye TREND resistance = $1919/oz
While there’s a better chance of me knocking out Ali in his prime than that level of the 10yr today, Gold is knocking on the door. It’s also at the top-end of my Risk Range AFTER the UST 10yr Yield went to the low-end of its Risk Range (1.55%).
Fundamentally, in hindsight of course, Gold went up as reported INFLATION ramped to new Cycle Highs and Real Yields fell in kind (you subtract the inflation rate from the long-term nominal yield).
That works until bond yields consolidate recent Cycle gains and take off higher again. There’s a good case to make that that happens from here AND the reported inflation rate flattens and/or falls. That means real rates pop higher again.
I can suffer through bond yields doing what they’ve done so far this week. I have plenty of patience with my process.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.55-1.71% (bullish)
SPX 4091-4222 (bullish)
RUT 2174-2265 (bullish)
NASDAQ 13,088-13,790 (bullish)
Energy (XLE) 50.71-54.76 (bullish)
Financials (XLF) 36.77-38.26 (bullish)
DAX 15085-15597 (bullish)
VIX 16.30-23.52 (bearish)
USD 89.29-90.55 (bearish)
Oil (WTI) 62.08-67.64 (bullish)
Nat Gas 2.90-3.11 (bullish)
Gold 1 (bearish)
Copper 4.44-4.81 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
