“Every fractal is the logical expression of a few straightforward ideas.”
-Benoit Mandelbrot
In simple Fractal Math terms (without giving away the codes to my Risk Ranges and/or TRADE/TREND/TAIL models) let me try to explain to you why yesterday was a big RESET Day for most things US Equity.
As The Brot reminds us in the most foundational book there is to the Hedgeye Process, The (Mis)Behavior of Markets, “in its first stages, any scientific investigation had better be simplistic; otherwise it will never fly.”
There is a 3-letter code to the construction of my models. “In the simple fractals described here, the initiator, generator, and rule make up the 3-letter code for construction, much like the four chemical letters of the genetic alphabet.” (pge 128)
Back to the Global Macro Grind…
In my models, real-time price movement is the INITIATOR and the Vol of Vol (volatility of volatility) of that price is the GENERATOR. There was a dude from Britain by the name of Hurst who died in 1978 who called what he did his “Rescaled Range.”
I call my real-time calculations my Risk Range™ Signals.
One of the big RULEs in my model is that the Risk Range™ Signals RESET when the volatility of the price moves from one of my 3 Volatility Buckets to another. As a reminder, these are the 3 Buckets of @Hedgeye Volatility:
- The Investable Bucket
- The Chop Bucket
- The F-Bucket
Every Asset Class, Equity, Commodity, etc. has different ranges of realized (historical) volatility therefore they all have different ranges for their respective buckets of volatility, but using the simplest example this morning, here are the ranges for the SP500 and Russell:
- Investable Vol = 9-19 VIX (or RVX)
- The Chop = 20-29 VIX (or RVX)
- The F-Bucket = > 30 front-month Volatility
RVX = front-month Russell Volatility. It joined the SP500’s VIX in The Chop Bucket yesterday with front-month closing at 29.41. Because I’m not terrible at front-running all of the models that I built, I covered my IWM (Russell 2000) short the day prior.
Why? Other than The Machine acting on it and driving everyone who chases price to act on it, why doesn’t really matter. WHEN that happens it almost always matters. If it didn’t, I wouldn’t use it as my Signaling Process!
Back to the Fractal Math of it all, here are the big RESETs in my Risk Range™ Signals this morning:
- SP500 Risk Range™ Signal has a big-higher-low of 3965 today vs. 3886 yesterday
- Russell 2000’s Risk Range™ Signal has a big-higher-low of 1788 today vs. 1758 yesterday
- NASDAQ’s Risk Range™ Signal has a modest-higher-low of 11,301 today vs. 11,112 yesterday
Why did I call SPX and IWM big-higher-lows and NASDAQ’s “modest”? Because I’m a really modest guy. I actually am in real life. I’m definitely not on Twitter. Yesterday I tweeted that I am “kind of hot and can really dance” (and some people believed me, lol).
Thanks for giving me a second to entertain myself this morning. You see, trying to explain what I do is a much more humbling challenge than simply executing on it. Sympathize with me!
No matter how “bearish” I’ve “sounded” to you since going Full Send Revenant Bear on NASDAQ, Russell, etc. back in January, you should always tune out the noises I make and #PayAttention to what I am doing in my Real-Time (Coaching) Alerts.
It’s not like the RESET Day is today (EL title says days) and I need to start acting on it. I’m explaining what I did to RESET:
- On this day last week I went to 7 LONGS and 10 SHORTS in RTA and -23% net SHORT in my Long/Short Book
- On Monday of this week I flipped that to 7 LONGS and 5 SHORTS in RTA and -4% net SHORT in my Long/Short Book
- Today I’ll start the day with 8 LONGS and 4 SHORTS in RTA and I’m still -4% net SHORT in my Long/Short Book
RTA (Real-Time Alerts) is NOT A PORTFOLIO. My Family Office Long Only Accounts are and my Long/Short Book are. So, sometimes they vary in ratios but they never vary in terms of the Real-Time Coaching direction I’m giving you via the Real-Time Alerts.
Oh, back to the modest thing. NASDAQ’s low-end of its Risk Range™ Signal moved modestly (as opposed to big) because #NazVol (front-month NASDAQ Volatility) closed at 31.03 and remains in the F-Bucket!
Can #RussVol go back to the F-Bucket today? A: definitely. The top-end of my Vol of Vol Risk Range™ Signal for RVX (Russell Volatility) is in the F-Bucket up at 34.11. Can the SP500’s? A: less likely with the top-end of my VIX Risk Range™ Signal = 30.41.
Do I have all the answers as to what is going to move where and when? A: Nope.
But I do have the modesty and humility to NOT tell either the PRICE or VOLATILITY of a market what to do. Most importantly, I accept that uncertainty as my reality. I accept just doing what markets are doing within the lens of my #VASP.
Immediate-term Risk Range™ Signal with @Hedgeye TREND signal in brackets
UST 10yr Yield 2.66-3.10% (bullish)
UST 2yr Yield 2.40-2.82% (bullish)
High Yield (HYG) 75.99-79.77 (bearish)
SPX 3 (bearish)
NASDAQ 11,301-12,496 (bearish)
RUT 1 (bearish)
Tech (XLK) 132-145 (bearish)
Utilities (XLU) 72.65-75.92 (bullish)
Gold Miners (GDX) 31.37-33.48 (bullish)
Shanghai Comp 3083-3283 (bullish)
Nikkei 26,526-28,297 (bullish)
VIX 23.06-30.41 (bullish)
USD 101.48-103.16 (bullish)
USD/YEN 127.55-134.19 (bullish)
Oil (WTI) 111.37-121.40 (bullish)
Nat Gas 8.23-9.61 (bullish)
Gold 1 (bullish)
Copper 4.15-4.54 (bearish)
Bitcoin 27,264-31,999 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
