“I’d rather be dumb and antifragile than extremely smart and fragile”
The hyperbole of that quote is that Taleb thinks he’s extremely smart. I’m definitely dumber than he is. So I guess he’d agree that I should never hire him to do what I can do better myself – manage real-time market risk. It’s a great job for a dumb hockey player.
Back to the Global Macro Grind…
The reason why I thought of Taleb this morning is that I was thinking about volatility. To his credit, he was one of the first to write about risk managing volatility from a market practitioner’s perspective. That doesn’t mean I agree with everything he wrote.
In terms of how we measure market entropy in real-time (multi-factor, multi-duration), yesterday was a one of the few critically bearish signal days for the US stock market.
To boil that down to 3 basic factors in our model (Price, Volume, and Volatility):
1. PRICE – SP500 A) failed to make a higher-high versus the 1808 all-time closing high and B) broke 1785 TRADE support
2. VOLUME – was +13% versus my immediate-term TRADE duration average (1st mini-volume spike on a down price move)
3. VOLATILITY – front-month VIX broke out above @Hedgeye intermediate-term TREND resistance of 14.91
This has never happened before (because the SP500 has never been at this all-time closing high before). But historically, countries, currencies, companies (anything with a ticker) do this frequently. And when they do, I respect Mr. Macro Market’s signal.
What is a bearish immediate-term signal @Hedgeye?
1. PRICE = down
2. VOLUME = up
3. VOLATILITY = up
1. PRICE = up
2. VOLUME = up
3. VOLATILITY = down
… is a bullish immediate-term signal @Hedgeye (especially when it’s happening within a bullish intermediate-term TREND).
Sure, I have been buying-the-damn-bubble #BTDB pretty much all year – but while I covered a couple of oversold shorts like CAT yesterday, I didn’t buyem on the long side. An intermediate-term TREND breakout in volatility is the #1 reason for that.
Are there tangible risk factors that could perpetuate an intermediate-term TREND move in US Equity Volatility back towards 20 on the VIX? Big time. Here are some behavioral ones that I discussed with clients in NYC yesterday:
1. VIX has been making a series of higher-lows since AUG as the Fed started to confuse with Taper-on/Taper-off in SEP
2. The average “net long” positioning of the hedge fund community is testing its all-time high zone of +60% again
3. The II Bull/Bear Spread just blew out to fresh 5 year highs of +4390 basis points to the BULL side
That last point is one of the more fascinating migrations I have seen in my career. To put a 44% spread between bulls and bears in context, that II Bull/Bear Spread was only +1710 basis points wide in the 1st week of September 2013.
Early September – that’s when people may have claimed to be “bullish” but they certainly weren’t positioned Bullish Enough. All this market needed to scare the hell out of the pretend bulls was a VIX rip to 17 in late August.
If the VIX goes to 17-18 tomorrow, people who are buying-the-damn-bubble #BTDB will get killed. So, if you have been in the habit of doing the buy on red, sell on green #GetActive thing, you want to be more careful buying now than you were last week.
How about fundamental research factors that could turn bearish in the next 1-3 months?
1. US Dollar being devalued and debauched (no-taper) towards its YTD lows
2. US GDP #GrowthSlowing from its cycle high of +3.6%
3. Down Dollar = Up Yen = Down Nikkei (another thing people didn’t enjoy in late AUG)
Rather than making up my own academic sounding word like antifragile, I’ll call managing real-time market risk this way what it is – being mentally flexible. If you can Embrace Uncertainty every market day, you might feel less dumb every once in a while too.
Our immediate-term Global Macro Risk Ranges are now:
UST 10yr yield 2.76-2.91%
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer