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WHAT DOES CRUDE OIL VOLATILITY MEAN TO YOU?

Market factors are contextualized differently based on our own trials and errors, experiences, and personal biases. As a sell-side independent research firm, we believe our process is positively differentiated with the active risk management overlay to our research. With this model comes the responsibility to consistently communicate and revisit this process.

 

Volatility in oil (and across asset classes for that matter), hit historic lows this summer at the highs in crude oil. The OVX index bottomed in June and reached its highest point yesterday since 2008.

 

The question then becomes, does the 3-day rip in energy prices and oil volatility starting last Friday support the case that oil has found real support in the $40’s?

 

We outlined the fundamental factors in the energy space moving to support prices, but the other side of our process tells us to fade this move for now. If history is any indication, two conclusions about prices and volatility in oil markets can be made:

 

1)      Volatility’s relationship with price looks very similar to equity markets.  Volatility and price have a tight inverse correlation

2)      The U.S. dollar is a leading indicator for big turns in prices and volatility

 

Regarding the first point, the 3-month, 1-year, and 3-year correlations are straightforward between WTI and WTI volatility and also WTI vs. the OVX Index. The short-term reversal is a counter-TREND head-fake.

 

WHAT DOES CRUDE OIL VOLATILITY MEAN TO YOU? - Price vs. realized and implied vol

 

WHAT DOES CRUDE OIL VOLATILITY MEAN TO YOU? - OVX vs. WTI correls

 

If you get the outlook for the U.S. dollar right you’ll get a lot of other things right. The dollar tends to lead turns in the oil market, as it has in each of the last four big downturns in oil. Our view on the outlook for the dollar is always communicated clearly (see this morning’s edition of the Hedgeye Macro Playbook for a refresher).

 

We covered our OIL SHORT position yesterday, our COPPER SHORT position today, and our USD LONG today. With the GDP miss and a preponderance of bad economic data, a bad jobs report tomorrow could be a catalyst for a near-term pullback in the U.S. dollar leading up to the Fed meeting in March.

 

The table below shows the performance of the U.S. dollar and OVX indices for the last four >20% peak-to-trough moves in oil along with a few supporting charts:

 

WHAT DOES CRUDE OIL VOLATILITY MEAN TO YOU? - Peak to Trough Oil vs. vol. vs. USD

 

Looking at OVX vs. the USD, longer-term they are positively correlated. A USD break-out to the upside has never been met by a sustained pullback in OVX. 

 

WHAT DOES CRUDE OIL VOLATILITY MEAN TO YOU? - OVX vs. USD correls

 

OVX vs. WTI vs. USD

 

WHAT DOES CRUDE OIL VOLATILITY MEAN TO YOU? - OVX vs. USD vs. WTI

Source: Bloomberg

 

3-Month WTI Volatility Index vs. Price

 

WHAT DOES CRUDE OIL VOLATILITY MEAN TO YOU? - 30 Day vol vs. WTI

Source: Bloomberg

 

We sent our first short oil signal via OIL to RTA subscribers on Monday at $11.22 (3:22 p.m.). We were early and shorted more on Tuesday at $12.02 (3:15 p.m.) for an average cost basis of $11.62. The position was covered yesterday at $11.01 (3:44 p.m.).

We will continue to short on strength on these exhausted moves to the upside unless the model tells us differently (bottoms are processes, not points).

We anchor on price, volume, and volatility factors for market signals within intermediate to longer-term market TRENDs for generating buy and sell signals.

 

To use the example of oil, what we would want to see for bullish confirmation is:

  • rising price
  • rising volume and open interest; On the back of
  • decelerating realized volatility; And,
  • a deceleration in front-month implied volatility

Rising volatility on the up move against a counter-TREND move (down dollar within a BULLISH TREND) is a leading indicator of continued volatility and widening risk ranges (more downside on the move back down)

The following link is a clip explaining this process on yesterday’s morning macro call:

 

Hedgeye Macro Call   

 

Oil had an epic move to the upside but on increasing volatility (OVX). Rising vol. while prices are rising on a counter-trend move (Bad econ, dollar down, commodities up) is not a good signal. While trending implied volatility in S&P front-month VIX hasn’t broken its bullish trend (still bullish). A widening range is a leading indicator for rising volatility.”

 

We often reference widening volatility as a signal for widening risk ranges, but these are in some ways complements of one another.

When volatility is increasing, the exhaustion points on both sides of a market (resistance bands) are farther away from where it is currently.

More involved than just using standard deviation to bet on a reversion, the volatility assumption is key to modeling the probabilistic expectation for different price movements.

For our bearish bias to be changed we need what look like longer term resistance levels to break and hold (the intermediate and longer-term lines did not on last Friday or Tuesday’s move). the price reached the top-end of our IMMEDIATE-TERM risk ranges, we is why we blasted the sell signal to subs.

 

Our intermediate-term TREND line (3-months or more) in oil is up at $56.68. Unless oil can break that line and hold, we’re viewing it with an intermediate-term bearish bias, and we’ll short on green and cover on red. By modeling this longer-term TREND we don’t capitulate on our thesis based on the day-to-day battle between all the robots. 

 

WHAT DOES CRUDE OIL VOLATILITY MEAN TO YOU? - levels chart

 

 

Ben Ryan

Analyst

 

 

 

 


 

 

 


China Market Follies

Let’s get this straight: First they had the rate cut… then they had the rumor of the rate cut… then they had the rate cut, after the rumor of the rate cut…and the stock market went down.

China Market Follies - ch5

 

The Shanghai Composite was down -1.2% overnight, and is now down 6 of the last 7 days to -3% year-to-date.

 

It’s now bearish on our trend duration, with the immediate-term risk range for the Shanghai Composite at 2917-3212.

 

*  *  *  *  *  *  *

 

Editor's note: This is an excerpt from our morning research. Click here to learn more and subscribe to Hedgeye’s Daily Trading Ranges.


HIBB - REMINDER Short Hibbett Sports BLACK BOOK Call

Takeaway: Hibbett Sports Black Book. Friday, February 6th at 11:00am ET.

Please join us tomorrow, Friday, February 6th at 11:00 am ET when we'll be hosting a call to review our next Black Book on Hibbett Sports. 

 

Since we launched our 90-page Athletic Black book in late December and our 60-page Short Foot Locker Black Book a couple weeks ago, Foot Locker has been something of a lightning rod, accounting for a disproportionate amount of our call volume. But we don't think that people are as focused as they should be on HIBB, which has major downside in the model.

 

Like in our Foot Locker Black Book, we’ll be doing a thorough deep dive into every line item and business driver for HIBB. 

 

Here’s Just a Few of the Topics We’ll Hit On

1) Store footprint potential vs what we see today.

  • HIBB overlap analysis with Dick’s, Academy, and Sports Authority – how much quality growth is left?

2) Productivity

  • Opportunity to take productivity higher via mix, with all else equal.
  • Trends in pricing vs mix, and why it leaves little upside in the model from here.
  • Productivity and profitability if ‘Nike ratio’ shrinks – either by design or by misfortune.
  • Impact of category trends on productivity.

3) e-commerce.  One of our key points is that store sales (barring 6% industry growth) will never grow again. In that regard…

  • What is the company’s installed investment base to facilitate e-commerce growth going forward.
  • How do consumers use the retail site as opposed to going to the Brand directly.
  • What are ‘free shipping’ trends in the Athletic space, and what are the ensuing margin implications.
  • Which retailers have the greatest risk as Nike goes more direct? When and where should we see it?

4) What SG&A levers can HIBB pull if the gross profit algorithm rolls. 

 

 

HIBB Call Info (Friday 2/6, 11:00 am ET)

Participant Dialing Instructions

Toll Free Number:

Toll Number:

Conference Code: 38877775

Materials: CLICK HERE


Early Look

daily macro intelligence

Relied upon by big institutional and individual investors across the world, this granular morning newsletter distills the latest and most vital market developments and insures that you are always in the know.

Keith's Daily Trading Ranges, Unlocked

This is a complimentary look at Daily Trading Ranges - our proprietary buy and sell levels on major markets, commodities and currencies sent to subscribers every weekday morning by CEO Keith McCullough. It was originally published February 5, 2015 at 07:49. Click here to learn more and subscribe.

Keith's Daily Trading Ranges, Unlocked - Slide1

 

BULLISH TRENDS

Keith's Daily Trading Ranges, Unlocked - Slide2

Keith's Daily Trading Ranges, Unlocked - Slide3

Keith's Daily Trading Ranges, Unlocked - Slide4

Keith's Daily Trading Ranges, Unlocked - Slide5

 

BEARISH TRENDS

Keith's Daily Trading Ranges, Unlocked - Slide6

Keith's Daily Trading Ranges, Unlocked - Slide7

Keith's Daily Trading Ranges, Unlocked - Slide8

Keith's Daily Trading Ranges, Unlocked - Slide9

Keith's Daily Trading Ranges, Unlocked - Slide10

Keith's Daily Trading Ranges, Unlocked - Slide11
Keith's Daily Trading Ranges, Unlocked - Slide12


Keith's Macro Notebook 2/5: China | Euro | Oil

 

Hedgeye CEO Keith McCullough shares the top three things in his macro notebook this morning.


THE HEDGEYE MACRO PLAYBOOK

Takeaway: Investors cannot afford to miss our immediate-term, intermediate-term and long-term scenario analyses for the U.S. dollar in today's note.

THEMATIC INVESTMENT CONCLUSIONS

Long Ideas/Overweight Recommendations

  1. Consumer Staples Select Sector SPDR Fund (XLP)
  2. SPDR Gold Shares (GLD)
  3. iShares 20+ Year Treasury Bond ETF (TLT)
  4. PowerShares DB U.S. Dollar Index Bullish Fund (UUP)
  5. iShares U.S. Home Construction ETF (ITB)
  1. LONG BENCH: Vanguard REIT ETF (VNQ), Utilities Select Sector SPDR Fund (XLU), Vanguard Extended Duration Treasury ETF (EDV), Healthcare Select Sector SPDR Fund (XLV)

Short Ideas/Underweight Recommendations

  1. iShares MSCI Emerging Markets ETF (EEM)
  2. SPDR Barclays High Yield Bond ETF (JNK)
  3. Industrial Select Sector SPDR Fund (XLI)
  4. SPDR S&P Regional Banking ETF (KRE)
  1. iPath S&P GSCI Crude Oil Total Return ETN (OIL)
  2. SHORT BENCH: SPDR Oil & Gas Exploration & Production ETF (XOP), CurrencyShares Euro Trust (FXE), WisdomTree Emerging Currency Fund (CEW)

 

QUANT SIGNALS & RESEARCH CONTEXT

Reviewing Our Bullish Bias on the U.S. Dollar From a Calendar Catalyst Perspective: With the DXY trading near the low end of our immediate-term risk range, we thought we’d review our bullish thesis from the perspective of navigating the macro calendar.

 

THE HEDGEYE MACRO PLAYBOOK - DXY

 

Over the next month or so, we would agree that further consolidation on the DXY is both healthy and justified in the context of the speculative net length in the futures and options markets. The net long position of 70,456 contracts is the widest net long position in the history of the U.S. Dollar Index (data since March 1995) and is nearly two standard deviations above its TTM mean, which indicates the presence of investors crowding into the trade.

 

THE HEDGEYE MACRO PLAYBOOK - EXTREME SENTIMENT MONITOR

 

Connect the dots on potential incremental consolidation in the U.S. dollar vis-à-vis peer currencies over the next 4-6 weeks:

 

  1. Draghi remains in wait-and-see mode amid positive 2nd derivative inflections across the preponderance of Eurozone growth data.
  2. The Fed openly acknowledges the marginal deterioration in the U.S. economy – largely citing lagging DEC/Q4 data – at its March 18th meeting.
    • Tomorrow’s jobs report will be critical to monitor in the context of this development.   
  3. There, it effectively punts any near-term rate-hike expectations well into 2H15 or beyond.
  4. By then, however, we’ll likely be receiving the second month of #GrowthAccelerating data points amid our #Quad414 theme.
  5. If the U.S. dollar corrects into mid-March, it would behoove investors to buy the dip then given that the next catalysts in the global currency war would be:
    • Potential BoJ easing at the end of April as Q1 data is likely to negatively inflect from the recent trend of recovery.
    • The ECB revisiting the pace of its QE program sometime in 2H15 as much lower Eurozone CPI readings effectively quash any remaining opposition from the Bundesbank.
    • The U.S. economy looking optically better through at least the end of April when all the MAR/Q1 data is reported.
      • The noise surrounding the Consensus Macro “lower gas prices” narrative will likely peak around then.

 

THE HEDGEYE MACRO PLAYBOOK - EUROZONE ECON SUMMARY

 

THE HEDGEYE MACRO PLAYBOOK - US ECONOMIC INDICATOR SUMMARY

 

THE HEDGEYE MACRO PLAYBOOK - JAPAN ECON SUMMARY

 

THE HEDGEYE MACRO PLAYBOOK - CRB YoY vs. CPI YoY

 

Beyond April/May, we view the following scenarios as the three most likely paths for the U.S. dollar to traverse:

 

  1. Straight the heck up as investors freak out and go to cash once the “lower gas prices” narrative completely morphs into “late-cycle slowdown” or “potential recession” in the U.S.:
    • The U.S. dollar probably rips higher on any U.S. recession freak-out (see: 2001, 2008) considering the current low levels of financial market volatility – which implies tons of dollar-denominated financial leverage that has yet to be [forcibly] unwound.
      • For example, emerging market corporations and banks have raised well over $2 trillion in dollar-denominated debt since 2010. Both debt redemptions and the FX-adjusted cost of financing are rising at accelerating rates for these borrowers.
  2. Down ~5-10% as the U.S. continues to muddle along at +/- 2% GDP growth for 2-3 quarters while easy comps perpetuate a recovery in both the Eurozone and Japan:
    • Based on the trend in initial jobless claims, a U.S. recession is likely within ~12 months of commencing, so the terminal downside in the DXY on any Eurozone and/or Japanese recovery narrative is somewhat limited from that perspective.
  3. To the moon if the 2016 election cycle is as anti-Fed as it has the potential to be (see: Jeb Bush and/or Rand Paul):
    • It’s tough to bet the house on that catalyst if George Bush or Mitt Romney were any indication of the GOP’s official stance on the Federal Reserve.
    • This we know, however: the next election most definitely won’t be dollar bearish… you physically can’t get any more dollar bearish than Bush/Obama + Bernanke/Yellen… well, maybe with the exception of Nixon/Carter + Arthur Burns.
    • Meanwhile open-ended QE has just begun in the Eurozone; it likely won’t produce the desired economic outcome(s), but that definitely keeps the ECB’s main refinancing rate unchanged for at least 1-2yrs.
    • Additionally, the Japanese populous just voted for round two of Abenomics; like the Europeans, they likely won’t hit their politicized economic targets, but that won’t stop the BoJ from getting creative every 6-12 months for the next 3-4yrs.
    • The U.S. has the best demographic curve of the G-3 economies, so the probability that the ECB and BoJ remain at ZIRP longer than the Fed (from here) is likely well north of 50/50.

 

THE HEDGEYE MACRO PLAYBOOK - DXY Recessions

 

THE HEDGEYE MACRO PLAYBOOK - U.S. 35 54 Year Old Population Growth

 

THE HEDGEYE MACRO PLAYBOOK - EUROZONE 35 54

 

THE HEDGEYE MACRO PLAYBOOK - JAPAN 35 54 YEAR OLD

 

If scenarios #1 or #3 are put in play, inflation expectations are likely to continue to decline and the current concept of “deep value” in commodities and high yield credit will come under severe pressure – especially the latter as the outlook for cash flow generation wanes:

 

THE HEDGEYE MACRO PLAYBOOK - DXY vs. CRB Index

 

THE HEDGEYE MACRO PLAYBOOK - DXY vs. Brent Crude Oil

 

THE HEDGEYE MACRO PLAYBOOK - Brent Crude Oil vs. Breakevens

 

THE HEDGEYE MACRO PLAYBOOK - DXY vs. USD OAS

 

THE HEDGEYE MACRO PLAYBOOK - DXY vs. Energy HY Index

 

If scenario #2 is put in play, then both emerging markets and commodity prices are likely to experience sharp relief rallies. We currently view that scenario as the least likely of the three so we are content to maintain our bearish biases on these asset classes with respect to the intermediate- term TREND and long-term TAIL.

 

***CLICK HERE to download the full TACRM presentation.***

 

TRACKING OUR ACTIVE MACRO THEMES

Global #Deflation: Amidst a backdrop of secular stagnation across developed economies, we continue to think cyclical forces (namely #StrongDollar driven commodity price deflation) will drag down reported inflation readings globally over the intermediate term. That is likely to weigh heavily upon long-term interest rates in the developed world, underpinning our bullish outlook for U.S. Treasury bonds.

 

The Hedgeye Macro Playbook (2/3)

 

#Quad414: After DEC and Q4 (2014) data slows, in Q1 of 2015 we think growth in the US is likely to accelerate from 4Q, aided by base effects and a broad-based pickup in real discretionary income. We do not, however, think such a pickup is sustainable, as we foresee another #Quad4 setup for the 2nd quarter. Risk managing these turns at the sector and style factor level will be the key to generating alpha in the U.S. equity market in 1H15.

 

Rearview Report:  Income & Spending Diverge in December (2/2)

 

Long #Housing?: The collective impact of rising rates, severe weather, waning investor interest, decelerating HPI, and tighter credit capsized housing in 2014.  2015 is setting up as the obverse with demand improving, the credit box opening and 2nd derivative price and volume trends beginning to inflect positively against progressively easier comps. We'll review the current dynamics and discuss whether the stage is set for a transition from under to outperformance for the complex.

 

HOUSING: Purchase Apps | Easings & Accelerations (2/4)

 

Best of luck out there,

 

DD

 

Darius Dale

Associate: Macro Team

 

About the Hedgeye Macro Playbook

The Hedgeye Macro Playbook aspires to present investors with the robust quantitative signals, well-researched investment themes and actionable ETF recommendations required to dynamically allocate assets and front-run regime changes across global financial markets. The securities highlighted above represent our top ten investment recommendations based on our active macro themes, which themselves stem from our proprietary four-quadrant Growth/Inflation/Policy (GIP) framework. The securities are ranked according to our calculus of the immediate-term risk/reward of going long or short at the prior closing price, which itself is based on our proprietary analysis of price, volume and volatility trends. Effectively, it is a dynamic ranking of the order in which we’d buy or sell the securities today – keeping in mind that we have equal conviction in each security from an intermediate-term absolute return perspective. 


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