“From a 21st century vantage point, calculus is often seen as the mathematics of change.”
- Steven Strogatz
But, instead of nowcasting the ROCs (rates of change), plenty of people who compete with us start with stationary vantage points about “valuation” and/or how much a market “should correct.” Many start with believable narratives too.
Strogatz is great at simplifying the complexity of our calculus approach. “Derivatives answer questions like ‘how fast?’ or ‘how steep?’ and ‘how sensitive?’… these are all questions about rates of change in one form or another.”
-Infinite Powers, pg 141
Answering rate of change questions with real-time economic and market data helps you play The Game at the highest level. What could change in the world today? In rate of change terms, everything is always changing.
Back to the Global Macro Grind…
Let’s go through some key rate of change questions that have new answers as of this week’s ROC data?
A) How fast did the US Consumption economy slow during the variant narratives in August?
B) How steep was the decline in the alleged US stock market correction?
C) How sensitive are people to a narrative that “consensus is actually quite bearish?”
On Consumption (US Retail Sales were reported for the month of August yesterday):
- US Retail Sales were +15.1% year-over-year in AUG vs. +15.1% in JUL (no accel or decel)
- On a 2-year basis, Retail Sales #accelerated to +9.0% in AUG vs. +8.9% in JUL
- The US GDP “Control Group” for Retail Sales #accelerated to +12.0% in AUG vs. +9.4% in JUL
On the depth of the current US stock market correction, the SP500 closed -1.4% from its all-time closing high. And on how sensitive people can be to quantified narratives, I trigger people with that kind of content all day long on Twitter:
A) Coming into this week, there was a net SHORT position in the SP500 of -22,822 contracts… and
B) There was a net SHORT position of -56,321 futures & options contracts in the Russell 2000… oh and
C) There remained a net LONG position of +44,467 in the Long Bond (UST 10yr notes)
To put that in rate of change context, we measure and map market positioning week-over-week, month-over-month, and within the context of how the positions move relative to their prior positioning (z-scores).
MAX LONG on the SP500, using only a 3-year look back = +245,514 contracts. That’s when consensus was bullish!
Another way to measure and map the ROCs (rates of change) of consensus market sentiment is through the lens of front-month options PREMIUMS and DISCOUNTS. I try my best to coach people through this math, daily, on The Macro Show:
A) SP500’s implied volatility went out at a +64% PREMIUM to 30-day realized volatility yesterday
B) NASDAQ’s (QQQ) implied volatility went out at +59% PREMIUM to 30-day realized volatility yesterday
C) Consumer Discretionary’s (XLY) implied volatility went out at +53% PREMIUM to 30-day realized vol yesterday
“But, but, KM… all of these numbers… what do they mean?”
The most important thing is that I know what they mean. The Question you should ask yourself is why do you waste your time reading people’s rants about what the market could or should do when they don’t write in ROC numbers?
People buy protection (puts) when they think something bad is going to happen (like a correction of 10-12% or a crash). That’s when PREMIUMs balloon like they have in the last 2-3 weeks.
What could change from here? Well, that’s easy. Today is Quad Witching Day (that’s a Quad that we didn’t invent) where approximately 3.4 TRILLION US options will expire (with 780 million of those being in single stocks)!
How steep is that on the time-series of the options expiration chart? A: The steepest for September, ever.
And you know what hedge fund gals and pizza-rating guys have to do once their options expire? A: Buy-more. And I’m betting they buy upside calls if stocks start to ramp throughout Earnings Season.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.28-1.40% (bullish)
UST 2yr Yield 0.20-0.26% (bullish)
SPX 4 (bullish)
RUT 2 (neutral)
NASDAQ 14,976-15,439 (bullish)
REITS (XLRE) 46.25-49.01 (bullish)
Tech (XLK) 155.68-160.17 (bullish)
VIX 15.31-21.12 (bearish)
USD 92.01-92.98 (bearish)
EUR/USD 1.176-1.190 (bullish)
Oil (WTI) 68.47-73.19 (bullish)
Nat Gas 4.59-5.62 (bullish)
Gold 1 (neutral)
Bitcoin 44,480-50,441 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
