“There is so much noise in judgment that a noise-free model of a judge achieves more accurate predictions than an actual judge does.”
- Danny Kahneman
My short-term buy and sell signals don’t make noises. They’re silent. The only noise I have to deal with is in my head.
You know that machines are better at making short-term risk management decisions than we are, right? They don’t care about our emotional lives or valuation models. They serve The Machine. It decides daily direction, not us.
As Kahneman reminded me in Noise: “More than 60 years after the publication of Paul Meehl’s Clinical vs. Statistical Prediction, the idea that mechanical prediction is superior to people is still shocking.” (pg 122)
Back to the Global Macro Grind…
The noises that I have to deal with in my thick skull are one thing. The noise of the crowd during Macro Tourist times of panic can be deafening. They were almost as loud as they get last Friday. And by yesterday’s close there were crickets…
I was selling US stocks and Global Equity exposures almost all day yesterday. I was buying Dollars, Brunellos, and Bonds too.
Why? You know that yesterday was the best 3-day rally for SPY in 2021, right? Yep. In a year where SPY has made a record 65 ALL-TIME closing highs, in the short-term that was about as good as a selling opportunity gets.
‘But, but, KM you said BTFD… and you did… and it’s Quad1, so… why?’
In the short-term (and I know, some of you are long-term, but you do panic and puke sometimes in the short-term, admit it), there’s no “fundamental” or “valuation” oriented reason “why” I de-gross & de-risk my book.
It’s just my #VASP (Volatility Adjusted Signaling Process). It doesn’t yell at me. It’s just math.
So let’s use SPY (SP500) as the simplest example on WHEN (not why) to buy/sell using only The Machine as my guide:
A) December 1st, 2021 the SP500 closed at the LOW-END of my Risk Range™ Signal at 4513
B) Front-month SPX Volatility (VIX) closed at 31.12 that day
C) Implied Volatility went out at a +92% PREMIUM vs. 30-day realized
Fast forward to a 1-week (I know, sounds like forever, eh):
A) December 8th, 2021 the SP500 closed within 0.1% of its ALL-TIME closing high at 4701
B) Front-month SPX Volatility (VIX) collapsed to close at 19.90 yesterday
C) Implied Volatility went out at 0% vs. 30-day realized volatility
That’s right, zero percent (0%). #crickets
Now I can understand that IF you didn’t know that 100% of the time the VIX ramps > 30 that you make +6% (on average) within 30-days… IF you’re not heading into a new pandemic…
That you probably had a lot of noises in your head on December the 1st (Wednesday after the worst 2-day decline in SPY since the last obvious Quad Shift was brewing in October of 2020)… or on December the 3rd where hedgies were dry heaving.
But if you just used the Vol of Vol Math and The Machine, you probably just made your month and the rest of the year.
Unless, you didn’t sell-SOME, de-grossing your exposure to a rare buying opportunity, and de-risking the fact that today there’s 6:1 downside vs. upside in my SPY Risk Range™ Signal vs. the 30:1 upside vs. downside at the December 1st close.
Playing The Game at the highest level isn’t what it used to be. If you don’t have a Macro North Star (Quad Shifts) and/or modern fractal math signaling to you when you are “feeling” the most, I am going to beat you, over Cycle Time.
Chill. I’m not talking about beating “you.” I’m saying we are going to beat them in terms of our data driven accuracy. The largest oversupply in our profession is in narratives and noise. Capitalize on that.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets:
UST 10yr Yield 1.34-1.61% (neutral)
UST 2yr Yield 0.46-0.72% (bullish)
SPX 4 (bullish)
NASDAQ 14,995-15,977 (bullish)
Tech (XLK) 166.21-174.05 (bullish)
Consumer Discretionary (XLY) 198-211 (bullish)
Housing (ITB) 75.99-83.51 (bullish)
Shanghai Comp 3 (bullish)
Nikkei 27,403-28,990 (bearish)
VIX 17.98-29.39 (bearish)
USD 95.56-96.67 (bullish)
Oil (WTI) 63.12-74.18 (bearish)
Nat Gas 3.13-4.69 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
