“As we get older, we define happiness less in terms of excitement and more in terms of peacefulness.”
-Sheryl Sandberg
How do you feel about Sheryl Sandberg’s views on that? I guess it depends on how old you are and where you are at in life but that definitely resonated with me. When it comes to my kids and firm, I could do without chronic volatility.
In markets, if you get the intermediate-term TREND in volatility right, you’re probably going to get the price of the underlying security right. Capital loves falling volatility inasmuch as it abhors it rising.
I’m spending more time studying the volatility of volatility than at any other time in my career. Measuring and mapping the rates of change in both realized and implied volatility is helping me understand the crowd’s positioning and improve my market timing.
Back to the Global Macro Grind…
“Market timing”, of course, are two very bad words … for people who are bad at it. The inability of consensus PMs to evolve on that front has been one of the many reasons for “active manager under-performance” in the last decade.
Q: if you’re an active manager, how does actively timing entry/exit points in the market not matter?
Big components of market timing include having top-down macro and bottom-up (company) research processes. Having a quantitative (price, volume, and volatility signals) risk management overlay is critical too.
One quantitative report I review before bed every night is our internal options market report which includes:
- Global Equities
- US Equities
- Commodities
- Fixed Income
- Currencies
On a multi-duration basis, the report measures and maps:
A) Realized volatility across durations (both absolute and relative to past positioning)
B) Implied volatility across durations (both absolute and relative to past positioning)
C) Implied volatility DISCOUNTS vs. PREMIUMS
Reviewing last night’s volatility report, you’ll see that:
- The SP500 has seen its implied volatility PREMIUM (vs. 30-day realized) spike to +89%
- The Dow’s implied volatility PREMIUM on the same durations has ripped to +97%
- The Russell 2000’s implied volatility PREMIUM remains steadily high at 89%
The words “remains steadily high” mean that the Russell PREMIUM isn’t new and spikey like the Dow and SP500’s is. That’s mainly because the Russell’s price level has been weaker on both a relative and absolute basis since peaking in early OCT.
In sharp relative contrast to the Russell’s performance, the Dow and SP500 just registered all-time closing highs less than 1 week ago today. The Dow’s implied volatility PREMIUM spike had the kicker of General Electric (GE) getting smoked yesterday.
What I call the GE move is an asymmetric “volatility cluster” within an index that is not showing a Bullish @Hedgeye TREND signal in volatility. Put simply, unlike GE, the Dow’s price is Bullish TREND, but its volatility signal is Bearish TREND.
So now what?
A) You just wait for the low-end of the @Hedgeye Risk Range in the Dow (23,369) and buy it
B) And/or you wait for the low-end of the @Hedgeye Risk Range in the SP500 (2575) and buy it
C) And/or you short either the Dow or the SP500’s volatility (Buy Puts, Sell Calls, etc.)
Try it. It’s not intellectually demeaning. You’ll feel better about your market timing, especially during raging bull markets.
At some point, the volatility of volatility will not be peaceful. It will, as market prices always do, eventually under-go a @Hedgeye Phase Transition to Bullish TREND in volatility terms… and voila, I’ll probably be bearish on US Equities again.
One of the fundamental research factors we’ve had you focused on is the US Profit Cycle #Accelerating in 2017. With over 90% of Q317 having been reported at this point, here’s the update on that front:
- SP500 aggregate year-over-year EPS growth = +7.7%
- Tech (within the SP500) aggregate year-over-year EPS growth = +26.0%
- Nasdaq aggregate year-over-year EPS growth = +22.0%
Is the end of Earnings Season the beginning of the end for the bulls? Or having missed calling for this kind of a profit #acceleration, is it the beginning of yet another new thesis drifting narrative for the bears?
I don’t know. I’ll have to wait and watch for Mr. Market’s messaging on that front. For now, I’m still at peace buying corrections when prices in things I like are at the low-end of the @Hedgeye Risk Range.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.30-2.43% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 6 (bullish)
VIX 8.70-11.78 (bearish)
USD 94.01-95.02 (bullish)
Oil (WTI) 54.05-58.58 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
