“I was set free because my greatest fear had been realized.”
-J.K. Rowling
I wonder what Harry Potter would think about the US stock market’s “valuation.” He’s pretty smart. I’m thinking he’d figure out that valuation isn’t a macro market catalyst.
The US stock market (SP500) closed at yet another all-time high yesterday and, amidst all of the political and existential fear in the world, the all-time lows in macro market volatility has been realized.
Moreover, in an obvious sign of both complacency (bulls) and capitulation (bears), IMPLIED volatility (i.e. the volatility investors expect in the future) is trading at a steep DISCOUNT to volatility’s 2017 realization.
Back to the Global Macro Grind…
That’s right. Ask @TruthGundlach. The SP500’s implied volatility is trading at a -28% DISCOUNT to what’s already been realized in the last 30-days. The SP500’s all-time closing high of 2503 puts it +11.8% YTD. That and US GDP #accelerating for the last 4 quarters is the truth.
Instead of trying to call tops and bottoms (been there, tried that), the @Hedgeye Risk Management #Process is designed to help you do what so many either say can’t be done or do poorly – make good decisions from a market timing perspective…
When making a buy/sell decision, here are 3 big things I always consider:
- Where is the price of a market within the @Hedgeye Risk Range?
- Where is the market positioned (net long or short)?
- Where is the implied volatility of the market’s price vs. what’s already been realized?
Knocking down those pins one by one:
- SP500’s immediate-term @Hedgeye Risk Range is currently 2
- SP500’s net LONG position = +175,457 non-commercial contracts = +1.65x on a 1-yrear z-score
- SP500’s 30-day realized volatility = 9.4%; front-month implied volatility = 6.8%
That last part is how the market registers the big capitulation/complacency signal (i.e. and implied volatility discount of -28%). If you look at something that used to have an implied volatility PREMIUM, but has a big DISCOUNT this morning, it’s the Russell 2000:
- Russell 2000’s immediate-term @Hedgeye Risk Range = 1
- Russell 2000’s net SHORT position = -102,151 non-commercial contracts = -1.83x on a 1-year z-score
- Russell 2000’s 30-day realized volatility = 12.3%; front-month implied volatility = 10.0%
Therefore the Russell 2000 has an implied volatility DISCOUNT of -19% this morning… and that comes after one heck of a 6-day move to the upside that was driven, primarily, by the Financials which have a 26% weight in the index.
Why? Hurricanes Gone => Reflation Stops Rolling Over => Rates Up => Financials (XLF and KRE) Up
Oh, and the Fed is up. And the big question I have there is whether or not the Fed could be any more dovish in either rhetoric or positioning as they were on Dudley’s comments right before Hurricane Irma hit (and the UST 10yr Yield bottomed at 2.02%).
Or was that a bottom? I don’t want to be calling tops or bottoms. That said, mathematically speaking, every bottom starts with a price (or yield level) making a series of HIGHER-LOWS. I’ll let Mr. Market make “the high conviction call” on that.
Back to the all-time lows in volatility… what’s super interesting right now is that this isn’t purely a USA phenomenon.
While the Russell 2000 volatility index (RVX) started the week at an all-time low of 11.83, the Eurostoxx 50 volatility index and the Emerging Markets volatility indexes are just off all-time lows too.
Since way too many market participants and pundits don’t think about market prices in volatility terms, in today’s Chart of the Day we show you what our team is measuring and mapping every day – Global Equity Volatility Indices.
If you look at equity volatility in context, here’s how it looks on a 5-year percentile basis:
- SP500 front month VIX = 10.22 = 2.6% 5yr percentile
- Nasdaq front month VXN = 12.51 = 5.2% 5yr percentile
- Russell 2000 front month RVX = 11.83 = 0.0% 5yr percentile
- Emerging Markets VXEEM = 13.93 = 0.6% 5yr percentile
- EuroStoxx50 V2X Index = 12.16 = 0.2% 5yr percentile
In other words, consensus stock market bears (the more politicized their views, the more obvious their fear) have seen their greatest fear realized. And that’s quite simply that there’s Zero Edge in fear-mongering when wrong on the data itself.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.03-2.26% (bearish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
Nikkei 190 (bullish)
VIX 9.44-12.31 (bearish)
YEN 107.89-112.18 (bearish)
Oil (WTI) 47.35-50.80 (bearish)
Best of luck out there today.
KM
Keith R. McCullough
Chief Executive Officer
