“We shouldn’t let an illusion of urgency force us to make decisions before we are ready.”
-Nelson Mandela
As Richard Stengel reminded me in Mandela’s Way: Lessons on Life, Love, and Courage, “27 years in prison teaches you many things, but one of them is to play the long game.”
“As a young man, Mandela was impatient. He wanted change yesterday. Prison taught him to slow down, and it reinforced his sense that haste often leads to error and misjudgment.” (Mandela’s Way, pg 171)
While my note about US stocks being “finally overdone” yesterday didn’t come in haste, I spent my entire day in New York debating investors on whether or not that was too “short-term” of a call and/or me getting too cute with timing…
Back to the Global Macro Grind…
Other than maybe my Mom, I don’t think anyone thinks of me as cute anymore anyway. I’m 42 years old. And while I haven’t spent time in prison, I’ve spent 18 years trying to figure out the difference between my short and long-term market views.
And I’m still working on it…
No, this isn’t easy. If it was, more people would get up at this ungodly hour and take a crack at making macro calls every day. That said, I love this game. And I like to have an explicit view. That market view can vary, across durations:
A) The Long Game (TAIL duration) – I’m super bullish on both the US Dollar and the prospects for Millennial Generation Consumption Growth Accelerating (see Chart of The Day)
B) The Short-Term (TRADE duration) – both the US Dollar and High Beta US Equity Style Factors are overbought
While it’s easier having complimenting views, across my TRADE (immediate-term), TREND (intermediate-term), and TAIL (long-term) durations (for the last 3 months), sometimes immediate-term TRADE risk develops and I’ll always call that for what it is.
And so will our “longer-term long-only” US Equity clients. Their duration is typically the intermediate-to-long-term (3 months to 3 years), so all I’m doing with them is helping them prepare for rising probabilities of corrections that they should capitalize on.
If those corrections never manifest, that’s fine. The idea is to have people think through multiple scenarios, across multiple durations, and multiple macro investment factors. Thinking intermediate-term within the long-term view is good.
Back to the short-term, one major focus I have these days is measuring and mapping what’s priced into options:
- When 30 and 60 day implied volatility is trading at a significant PREMIUM to realized volatility = bullish
- When 30 and 60 day implied volatility is trading at a DISCOUNT to realized volatility = bearish
As always, what matters most to me is both the rate of change in volatility data and the signal itself. After yesterday’s +1.1% ramp to new highs for the Financials (XLF):
- 30-day implied volatility dropped to a -4.7% DISCOUNT and
- The XLF is signaling immediate-term TRADE overbought at $24.27
So, the shorter-term risk manager in me says:
A) Cool, because our TREND and TAIL investing clients have been buying Financials on every dip, for 3 months, and…
B) This is a great spot to book some gains
No one ever went broke booking gains.
And if you don’t want to book gains, that’s cool too. I think about these differences of opinion a lot like I think about fishing with a group of buddies up north. When I’m satisfied with my catch, I’m dropping my out-board motor and heading back to camp…
I like to have time to enjoy my meal, relax, and prep for tomorrow’s trip. If you want to stay out there catching more fish, that’s totally up to you. We don’t have to judge one another’s intellectual investing quotient on our differing opinions about duration.
Looking for where the fish are/aren’t tomorrow?
Here are some more 30-day implied volatility premiums and discounts to consider this morning:
- Nasdaq is still trading at a hefty implied volatility PREMIUM of +61.9%
- Consumer Discretionary (XLY) has a big implied volatility PREMIUM of +51.6%
- Copper (JJC) has a tasty implied volatility DISCOUNT of -18.8%
And, again, this is just one of the multiple-factors I consider when making my next timing decision to capture some alpha. But the way I read the aforementioned 3 signals is:
A) On a correction to the low-end of my risk range, I’d much rather buy QQQ or XLY than Copper
B) Inflation #Accelerating expectations, in Copper terms, are definitely starting to get priced in…
While I’d love to see a -3% correction in the Nasdaq tomorrow, I highly doubt I’ll catch that size of a fish. Then again, I have no illusion of urgency that I need to wake up hoping for that either. Hope is not a risk management process.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.34-2.53% (bullish)
SPX 2 (bullish)
NASDAQ 5 (bullish)
VIX 10.45-12.05 (bearish)
USD 99.50-101.35 (bullish)
EUR/USD 1.05-1.08 (bearish)
Copper 2.69-2.81 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
