“Think of dimension, not as an inherent property, but as a tool of measurement.”
-Benoit Mandelbrot
Oh yeah. After another epic 3-day US stock market correction (biggest down day was -0.2%), I’m bringing back The Brot! US, European, Japanese, South Korean, etc. stock market bears hate it when I go all fractal dimension on them.
So how much further can stocks go?
“A useless question, as we have seen… but one way around the problem is to plot on a graph the measurement you get for each size ruler you use. Of course, the measurements increase as the rulers shrink…”
“But – happy surprise – they often do not so at a near-steady rate… something unusual develops as you use ever-smaller rulers: The length you measure is growing faster than the rulers are shrinking. And that phenomenon is measured by a quantity called fractal dimension.” (The (mis)Behavior of Markets, pg 130-131)
Back to the Global Macro Grind…
Whether you’re a student of Mandelbrot or just a market practitioner trying to teach yourself, eventually you will learn that macro markets are multi-dimensional. You’ll need to consider multiple factors and multiple durations when analyzing them.
That’s why measurements are so critical to my process. While big Macro Themes (like growth slowing or accelerating) eventually emerge, I personally need to do a lot of work sequencing the non-linearity of it all.
Look at this morning’s main macro moves, for example:
- Euro Up
- European Rates Up
- European Stocks Up
If all you were doing was running a macro portfolio based on trending correlations, you might be having a bad day.
Why? The Euro has a trending (duration = 3 months or more) inverse correlation with major European stock markets, whereas the immediate-term TRADE (3weeks or less) duration reveals a POSITIVE correlation between those 2 factors.
This is where measuring and mapping the “move relative to itself” comes in:
- EUR/USD is at the top-end of its immediate-term $1.05-1.08 risk range
- German 10yr Yield has recaptured intermediate-term TREND support of +0.35%
- Spanish Stocks (IBEX) +0.8% this morning and +7.7% in the last month alone are at the top-end of my range
FX Up, Rates Up – yep, that’s a growth acccelerating “initiator” to a fractal pattern that’s been tested and tried across cycles. I don’t look for it – I just acknowledge it, and start asking myself questions from there:
- Is European Growth accelerating?
- Does European Growth have “tough” or “easy” compares in Q2-Q4 of 2017?
- What about that intermediate-term TREND level of EUR/USD $1.10 resistance?
I’m often humbled by having an opportunity to answer questions about my process. The thing about building one over the course of one’s career is that it’s ever-changing and evolving. So I can’t thank all of you enough for helping me find a better way.
If I look back 10-18 years ago, I didn’t apply an effective measurement process in lieu of what I call my “risk range” today. If I can’t dynamically sequence the moves of both data and markets, what would I really be doing? Just reacting to the moves, I guess.
What Mandelbrot developed is called his “rescaled range analysis.” What he meant by that was “range divided by standard deviation.” So, since I’m not giving my model away, I encourage you to study the mathematical principles behind that.
I know. Some people don’t want to learn – they just want to be told what to do!
And I’m totally cool with that. God willing, we’re all busy doing many things in this good life. And my research team and I accept the responsibility of being one of your macro economic and market sources.
On the aforementioned USD and US Rates oversold signal (within the risk range and bullish intermediate-term TRENDS), here are some of the things I’d be doing this morning:
- Buying more US Dollar exposure around 99.00-99.60 on the US Dollar Index (DXY)
- Selling some of the the GBP/USD net long exposure in the $1.24-1.25 zone
- Shorting some Euros (vs. USD)
- Booking some European Equity gains
- Buying some US Bank Exposure (I like BAC, closing at the low-end of its risk range yesterday)
- Not buying into the “Reflation Rally” (especially in consensus net long positions like Oil/Energy)
And all the while I’ll be meeting with investors in NYC, trying to answer their questions. Sometimes I think I know the answers; sometimes there’s no clear answer at all. That’s why I have my tools for measurement and look forward to the next market day.
Our immediate-term Global Macro Risk Ranges are now (with intermediate-term TREND views in brackets):
UST 10yr Yield 2.45-2.65% (bullish)
SPX 2 (bullish)
NASDAQ 5 (bullish)
XOP 35.42-37.09 (bearish)
Nikkei 195 (bullish)
DAX 118 (bullish)
VIX 10.77-12.26 (bearish)
USD 99.60-102.25 (bullish)
EUR/USD 1.05-1.08 (bearish)
Oil (WTI) 47.09-50.20 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
