“There were too many price jumps to fit the bell curve.”

-Benoit Mandelbrot

Oh no you didn’t. You didn’t think macro market exposures (like US Growth Accelerating, FAANG, Reflation’s Rollover, etc.) fit a simple moving average price momentum pattern, did you?

Been there, done that. I have nothing personal against Old Wall “technicians” who use single-factor price momentum as their “signal.” I simply don’t think that what they do works as well as what I’ve learned to do (or I would do what they do).

Chasing high and freaking out low is not what any risk management firm should encourage you to do. When stocks get to the top-end of our risk range, we tell you to sell. When they get to the low-end of the range, we encourage you to buy and/or cover.

Tech Rout or Ramp? - 04.17.2017 moving average cartoon

Back to the Global Macro Grind…

The aforementioned quote comes from Brot’s Bible, The (mis)Behavior of Markets, in a chapter where he explains his observations using IBM super computers to analyze how Cotton prices trade.

“The price changes from one day to the next, one week or month or year to the next, did not behave as the Bachelier model assumed. The variance misbehaved. Each time I added an extra price change to the data set my estimate of the variance changed. It never settled down to one number – say 1% volatility. Instead it roamed erratically.” (pg 162)

Again, I’m not trying to insult the Old Wall’s ways. I’m trying to help us all evolve the process by which we attempt to measure and map multi-factor risk. Have you ever read an establishment “technician” talk about the volatility of volatility?

Nope. It’s all about static, point and click, 50 and 200 day moving monkeys, bro.

This is not to say that PRICE MOMENTUM as a market factor doesn’t matter. With an over-supply of asset management products competing for flows, an argument can easily be made that something like 1-month price momentum has never mattered more!

But how about 1-day price momentum?

The Nasdaq dropped > 3% in less than 1 full-day of trading and the punditry of our profession went ape. Inasmuch as price momentum matters, performance does. There are plenty of short-term hedge funds that stop their PMs out at -3% book losses.

Those were some of the guys and gals who sold the low of the day yesterday. Commonly called getting “tapped” (on the shoulder), when they lose 3% or more of their capital, their firm stops them out.

Then the bounce…

Then you’re sitting there staring at this super-short-term volatility cluster on your screen asking yourself what the hell just happened as intermediate-to-longer-term investors simply absorb capitulation-type-supply and move on with their day.

BREAKING: “Tech Rout Fades” –Bloomberg

Yep, the Nasdaq is -2.3% from its June 2017 all-time closing high. The SP500 and Russell 2000 are -0.4% and -0.1% from their respective all-time (which remains a very long time) highs, and “the rout” is over. Lol!

I don’t mean to laugh (if you can’t laugh at yourself in this business, the rest of us will eventually laugh at you). But seriously. Have we institutionalized uber-short-term performance pressure to the point where 1-day of non-trending volatility can kill your year?

The way I see it is that if you were either:

A) Too complacent to sell some of your gross and net long exposure on Tech on overbought signals

B) Or capitulating, covering your shorts, at the all-time highs…

*See my end of May 2017 Early Look titled “Complacency or Capitulation?” for data that timed those immediate-term tops

Then you deserved to lose money and/or have an opportunity to learn a big time market timing lesson. “Believe me”, in the end, you’ll be like me, having made most mistakes possible, and learning from them, instead of making them over and over again.

Now that we’re back at the low-end of the risk range for the Nasdaq, instead of anchoring on the 1-day “rout” let’s get back to focusing on the intermediate-term ramp:

  1. Nasdaq is +19.2% in the last 6 months and remains bullish TREND (intermediate-term duration) @Hedgeye
  2. Tech (XLK) is +17.8% in the last 6 months and remains bullish TREND @Hedgeye
  3. Consumer Discretionary (XLY) is +9.5% in the last 6 months and remains bullish TREND @Hedgeye

These trending returns associated with being allocated to US #GrowthAccelerating are of course pounding what’s been a legitimate (relative and absolute) rout of Reflation’s Rollover:

  1. CRB Commodities Index is -8.6% in the last 6 months and remains bearish TREND @Hedgeye
  2. Oil (WTI) is -15.7% in the last 6 months and remains bearish TREND @Hedgeye
  3. Energy Stocks (XLE) are -11.2% in the last 6 months and remain bearish TREND @Hedgeye

Looking at the Long Tech (XLK) vs. Short Energy (XLE) view in volatility space:

A) Tech (XLK) has an implied volatility PREMIUM (vs. 30-day realized) of +9%

B) Energy (XLE) has an implied volatility DISCOUNT (vs. 30-day realized) of -2%

Instead of just staring at a moving monkey, if you’re measuring/mapping price, volume, and volatility data, across durations and market factors, daily… you’ll remember that as the Nasdaq was registering overbought highs, it had developed an implied volatility discount too.

Now it doesn’t (Nasdaq has an implied volatility PREMIUM of +15% vs. 30-day realized), but Energy does. And Energy stocks are back at the top-end of my immediate-term risk range whereas the top-end of the Nasdaq’s range is up at 6356.

Imagine, for a crazy second, that we eventually see (in 2017) a new all-time closing high of Nasdaq 6356. Will they call that a ramp or a rout? I guess it depends on what side of the market you took at yesterday’s lows.

Our immediate-term Global Macro Risk Ranges (intermediate-term TREND views in brackets) are now:

UST 10yr Yield 2.14-2.30% (neutral)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6155-6356 (bullish)
XOP 31.25-33.49 (bearish)
VIX 9.31-11.77 (bearish)
EUR/USD 1.10-1.13 (bearish)
Oil (WTI) 44.88-48.19 (bearish)
AMZN 960--1020 (bullish)
GOOGL (bullish) 

Best of luck out there today,

KM 

Keith R. McCullough
Chief Executive Officer

Tech Rout or Ramp? - 06.13.17 EL Chart