“Suddenly, turbulence ceases to be a metaphor.”
-Benoit Mandelbrot
I thought Trump was supposed to be “volatile” for financial markets?
In non-partisan-news this morning, at the all-time closing highs for the US stock market I’m happy to report that 30 and 60 day realized volatility in the Dow, SP500, and Nasdaq just hit their lowest levels since 2007.
As my man, The Brot, taught me in a chapter he titled “Turbulent Markets”:
“Multi-fractals make turbulence a fundamentally new way of analyzing finance. Markets no longer appear in the entirely rational, well behaved patterns of past financial theories. They are seen for what they are: dynamic, unpredictable, and sometimes dangerous systems…” (The (mis)Behavior Of Markets, pg 121)
Don’t go overweight the word dangerous vs. dynamic either. Sometimes the danger is in not being Bullish Enough.
Back to the Global Macro Grind…
And don’t worry, I’m not going to tell you do be the guy/gal chasing the all time closing highs of 2307 and 5715 in the SP500 and Nasdaq this morning. Just like on January 26th (pre a tolerable correction), my call would be to sell-some here.
That’s right – it should be easy enough to do if you’ve been buying every damn dip. No one every went broke booking gains. And you definitely want to be able to have the capacity to buy-some back on non-turbulent corrections.
Unfortunately (for them), looking at what’s been priced into implied volatility for US Equity Beta (SP500), consensus has been selling, not buying, during corrections:
- With 30-day realized volatility in the SP500 at 6.3%, implied volatility has a +34.2% premium
- With 60-day realized volatility in the SP500 at 6.9%, implied volatility has a +50.6% premium
As you can see in today’s Chart of The Day, 60-day realized volatility for the SP500 is at THE cycle low. That’s pulverized the bears. Having been one plenty of times in my career, “believe me!”
What a bear should want to see is implied volatility trading flat and/or at a discount to what’s already been realized in the market. That’s precisely what happened in August of 2016 and partly why the SP500 traded down, from there, into the election.
Now, we’re 3 months into having nothing but straight-up since the election and being on the road seeing Institutional Investors across Texas this week (Houston, Austin, Dallas) all I get asked is “when, and how hard, we start to correct.”
Here’s how I’ve been answering that question:
- I’m not calling for a correction yet, because I think the market is going to continue to make all-time highs
- The most logical catalyst for a correction is when the market gets exhausted to the upside, and bears capitulate
- If you’re looking for a fundamental catalyst, the first big one is in April when we get Q1 US GDP
Then I tell people that, like them, I reserve my unalienable rights and free market liberties to change my mind on points 1 and 2 as time and prices change. As of this morning, I guess I’d say that between 2 is as good a spot as any to book gains.
Don’t confuse my sell-some level with some magical type of a “valuation” call. It’s simply an exhaustion level with a catalyst that will soon be less than 1.5 months away.
Why would a “negative” US GDP reading for Q1 of 2017 (we’re currently at -0.76% on a q/q annualized basis) be a negative catalyst? Well, not because Old Wall Media will understand why it’s “negative” (it’s actually +1.5% on a year-over-year basis):
A) It’s because establishment media is literally begging for any data point to disconfirm that Trump has impacted the economy
B) Since they didn’t get that in the latest jobs report and/or earnings season, they need something bearish, fast!
While my model isn’t signaling one yet, I’d love to see a -5-10% US stock market correction on something like that. You know why? Because I’m going to buy the living daylights out of it.
Why?
- Post US GDP slowing in Q1 to +1.5% y/y (implying negative -0.76% q/q annualized)
- We have GDP accelerating in Q2 to +4.2% q/q (which implies +2.2% y/y)
- And, especially for the Financials (XLF), Q2 is the easiest EPS compare since the 08’ crash
How easy it is to forget how bad things were for the Financials (XLF) in Q2 of 2016 when May non-farm payrolls came in at 24,000 and bond yields crashed to all-time lows…
Now that’s what banks get to “compare” against – an aggregate EPS decline for the Financials of -14.2% year-over-year in Q216.
When you think about it that way, what US stock market bulls should really want (after booking some gains) is a whole world full of tangible market turbulence. And I mean the real stuff, not just the Trump metaphor.
Our immediate-term Global Macro Risk Ranges (with TREND views in brackets) are now:
UST 10yr Yield 2.34-2.54% (bullish)
SPX 26 (bullish)
RUT 1 (bullish)
NASDAQ 5 (bullish)
Nikkei 188 (bullish)
DAX 112 (bullish)
VIX 10.42-12.39 (bearish)
USD 99.30-101.10 (bullish)
EUR/USD 1.05-1.08 (bearish)
YEN 111.50-114.25 (bearish)
Oil (WTI) 51.90-54.29 (bullish)
Nat Gas 2.95-3.23 (bearish)
Gold 1195-1251 (neutral)
Copper 2.60-2.74 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
