“Time, not space, is the scaling factor.”
-Benoit Mandelbrot
Oh no you didn’t. You didn’t buy the damn dip again on that mainstream-media-Trump-fear-mongering and make money again, did you? 3 straight up days for US stocks it’s been since. The VIX is back at 10. And now you can book some more gains.
Don’t ask your partisan Trump and/or “valuation” bear why we rallied. You’ll get the same answers on why the score of this year’s equity return game isn’t “right” or “fair”, or something like that…
Instead, let’s ask The Brot. Why the scaling of Trump’s Wall of worry? Or, more specifically, as Mandelbrot himself asked us @Yale, “what does it mean that the price-changes scale?”
Back to the Global Macro Grind…
Unlike many Old Wall Media market strategists, economists, and pundits, Benoit Mandelbrot taught us how to apply some of the basic laws of physics to our risk management process.
“In physics, I learned there is a clear barrier between the very large and the very small, at the very large scale of the cosmos, the relative space-time laws of Einstein apply. In the medium-scale world of our daily lives, Newtonian mechanics hold. And in the subatomic world of electrons and quarks, the entirely different laws of quantum mechanics apply…”
“Three different regimes, three different scales, each one distinct from the last…”
-Mandelbrot (The (mis)Behavior of Markets, pg 168)
That, in case you care, is why I built my macro model using 3 distinct durations (TRADE, TREND and TAIL). I don’t believe markets operate in an efficient and linear vacuum where everyone has the same investing duration and decision making process.
Nor do I believe that short-term phase transitions in price, volume, and volatility don’t change the scaling factor of market moves. They matter, a lot – especially if you can contextualize them with trending (longer-term) macro research themes.
Enough about why I do what I do…
Since I’m now supposed to stand on my thick head and perform the next “market call” trick, bear with me as I get on with why “Why Not Lower?” was an immediate-term TRADE oversold signal in the SP500 in Thursday morning’s Early Look at SPX 2357.
It was just math.
“Why Not Higher?” (again) from here? Well, since my signal says the market may or may not trade higher, I have a lot less to be definitive and actionable about as I was on the May 11th oversold and May 18th overbought signals because:
- The SP500 is not yet at the low or high end of its immediate-term 2 risk range
- The Nasdaq is not yet at the low or high end of its immediate-term 6045-6202 risk range
- US Equity Volatility is not yet at the low or high end of its immediate-term 8.92-15.42 risk range
No. That is not a typo. The low-end of my risk range for what has been perceived to be “Trump Volatility” has an 8-handle in front of it! Before you growth bulls get all horned up about that, the top end of the range is plenty volatile at 15-16 too.
Put another way, what I consider the “probable range” whereby I am going to make immediate-term decisions is wide and widening. That’s probably why the volatility of volatility (something Mandelbrot studied more than most) is rising…
P.S. if you’re buying stocks (after the 3-day ramp) today, widening ranges are usually not a good thing.
Neither is implied volatility trading at a DISCOUNT to realized volatility. That’s also new this morning:
- Both the SP500 and Nasdaq had consistently high implied volatility PREMIUMS (vs. 30 day realized volatility)
- As market prices have scaled higher from every single immediate-term oversold low, PREMIUMS have burned off
- This morning the SP500 has an implied volatility DISCOUNT of -3.9% vs. 30-day realized
- The Nasdaq’s implied volatility PREMIUM has been smashed down to +0.9% vs. 30-day realized
- The Financials (XLF) have an eye-opening implied volatility DISCOUNT of -17% vs. 30-day realized
So I’m definitely not buying the Financials or the SP500 today! They’re neither at the low-end of my risk range nor providing me tasty, fat, implied vol premiums.
If you’re not fluent in either physics or options markets, you can still understand my point.
If the current market price expects the future price to have no more volatility (or less) than what’s already been realized AT THE ALL-TIME HIGHS for US stocks, that is called either complacency (bulls) or capitulation (bears)… or both.
And only time (i.e. the next market price, volume, and volatility data) will provide us a probability matrix for the market’s next move. So, if you don’t mind, I need more time to make another “market call.”
I’ll be back to you tomorrow morning on that.
Our immediate-term Global Macro Risk Ranges (and intermediate-term TREND research views in brackets) are now:
UST 10yr Yield 2.17-2.43% (bullish)
SPX 2 (bullish)
NASDAQ 6045-6202 (bullish)
VIX 8.92-15.42 (bearish)
EUR/USD 1.08-1.12 (bearish)
Oil (WTI) 46.06-51.35 (neutral)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
