“You’ve got to know when to hold ‘em,
Know when to fold ‘em,
Know when to walk away,
And know when to run.”
- Kenny Rogers, “The Gambler”
If the stock market feels like a casino to you these days, you're not alone. Given the level of current equity volatility, the market is trading like we simply need to decide whether to bet on red or black (depending on the day). The concept of random outcomes is frustrating to those of us who grind away daily trying to get an edge. But inside that noise lies opportunity.
The interesting thing about volatility is that it does have some predictable patterns. Consider the last 10 years of the VIX as an example:
- Over the last decade, the VIX has breached 30 exactly 9 times
- If you had bought the VIX when it breached 30, you would have made money 8 out of 9 times over the next 30 days
- The average gain was +6% for the SP500 over those periods
- The only time this batting average didn’t hold was in March 2020 when we were in #Quad4
As always, we play the game in front of us. Perhaps this will be the 1 out of 9 times that the SP500 loses money? Perhaps not. As a gauge of volatility, the VIX measures investor psychology. Therefore, a rapidly increasing VIX typically represents the puking (to use a scientific term) of stocks.
But as Warren Buffett famously said:
“Be greedy when others are fearful.”
Speaking from my own personal experience, that isn't always easy to execute on! Fortunately, data helps.
Back to the Global Macro Grind…
We hosted a Flash Call yesterday updating our Macro Themes and highlighting the shift from Quad 2 to Quad 1 heading into 2022. It is certainly possible that the emergence of the Omicron variant throws off the growth accelerating component of this call. There are other risks as well: U.S. government shutdown, war between Ukraine and Russia (and really any other headline coming from ZeroHedge!)
On the topic of Omicron, South Africa's daily case count over the last three days is trending as follows: 4,373 -> 8,561 -> 11,535. That is fast spread. That said, we should consider the context. South Africa has relatively low full vaccination rate of ~25% and about 1/3 used the less effective Johnson and Johnson vaccine, so South Africa is much less protected than the U.S.
There's always a bogeyman or some "end of the world" narrative being bandied about, but whether it is an economy or a company the data typically prevails. As data goes, we don’t see a lot that concerns us right now.
Consider some key data this week that supportive of our #Quad1 call:
- November ISM U.S. Manufacturing accelerated with new orders increasing to 61.5 from 59.8;
- The Prices paid component of the ISM report saw a decline to 82.4 from 85.7;
- While we will get the river card today on November Non-Farm Payrolls, this week’s Jobless Claims at 222K remained near a pandemic low and Challenger planned job cuts were -77% Y/Y; and
- Visa stated this week that November U.S. payments were +133% of 2019 levels and Global transactions were 126% of 2019 levels; and
In particular, the ISM report was noteworthy in terms of the decelerating of inflation. As noted above prices declined, but perhaps more importantly so did backlogs and delivery times. Alongside the decline in oil prices (-~15% over the last month), the easing of supply chain issues is the other key to seeing inflation decelerate. There are many recent examples of supply chains starting to ease and South Korea seeing +40% growth in semiconductor exports this week is a big one.
Speaking of international data, the South African Composite PMI for November accelerated to 51.7 from 48.6. This is the highest reading for South Africa since May and within the survey respondents said:
“Expectations for the future remain strong, as firms continued to predict a recovery from the pandemic.”
But, but, but . . . what about Omicron? The South African stock market may be telling us something. It's up +4% for the month.
The Eurozone Composite PMI for November also accelerated this morning to 55.4 from 54.2. This is noteworthy because it comes despite COVID cases accelerating meaningfully throughout all of November in the Eurozone. Even Germany which saw pandemic highs in daily new COVID cases in November, saw an acceleration in its PMI.
Needless to say, if you are sitting at the portfolio table and deciding whether to “fold ‘em” or “hold ‘em” just take the time to check the fear and consider the data. Most importantly remember that “you never count your money when you’re sitting at the table.”
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.36-1.72% (bullish)
UST 2yr Yield 0.46-0.68% (bullish)
SPX 4 (bullish)
NASDAQ 15,1162-16,166 (bullish)
RUT 2126-2305 (bullish)
Tech (XLK) 164.97-172.32 (bullish)
Consumer Discretionary (XLY) 199-215 (bullish)
Energy (XLE) 53.13-57.91 (neutral)
Financials (XLF) 37.09-40.54 (neutral)
Shanghai Comp 3 (bullish)
Nikkei 27,180-30,345 (neutral)
DAX 14,860-16,301 (bullish)
VIX 13.95-31.10 (bearish)
USD 95.35-96.90 (bullish)
EUR/USD 1.119-1.142 (bearish)
Oil (WTI) 61.13-81.21 (bearish)
Nat Gas 3.91-5.00 (bearish)
Gold 1 (bearish)
Copper 4.20-4.50 (neutral)
Keep your head up and stick on the ice,
Daryl G. Jones
Director of Research
