“To be principled means to consistently operate with principles that can be clearly explained.”
-Ray Dalio
That quote comes from the second page of a book you should have on your desk. It’s from an updated and reader-friendly Principles by Ray Dalio. From what I’ve read so far, I’ll call this a must-read.
Why do I respect Ray Dalio? He has a world class #process. Unlike some investors, he also has humility: “you, like me, probably don’t know everything you need to know and would be wise to embrace that fact.” That’s from page 3.
“People who have shared values and principles get along. People who don’t will suffer constant misunderstandings and conflicts.” Gotta agree with you on that too, Ray. The rate of change of the data doesn’t lie; conflicted and compromised people do.
Back to the Global Macro Grind…
We finally got ourselves a 1-day correction in the US stock market that was greater than 35 basis points. Asian Equity markets responded with broad based correction of -1.0-1.6%, across the board. Hoowah! It’s time to get to work this morning.
Whether you want to call it a “correction” or not is up to you. Whenever a market moves (up or down), from an immediate-term #process perspective I care mostly about the positioning of the market’s last price relative to where it came from.
Here are some of the core things I’m constantly measuring and mapping in order to contextualize last price:
- Where is last price within the market’s immediate-term @Hedgeye Risk Range?
- Where is the options market pricing risk vs. what’s already been realized through last price?
- Where is the market positioned (long, short, neutral) vs. where it was positioned prior?
So, to use the most basic market price (the SP500) as an example, here’s what I’m looking at this morning:
- SP500 immediate-term @Hedgeye Risk Range = 2
- SPY’s implied volatility PREMIUM ramped to +63% vs. 30-day realized (vs. only 9% less than a week ago)
- SPX (Index + E-mini) net LONG positioned ballooned to +179,261 contracts last week
In other words, the SP500 is currently:
A) Smack in the middle of my immediate-term risk range
B) Consensus continues to buy protection (rather than buy dips) on all “corrections”
C) Consensus was forced to get as long as it has been in a year, AFTER the all-time highs
In order to get me excited to buy-the-damn-dip-again, what I’d really like to see is a market price that moves to the low-end of my risk range with an even higher implied volatility premium and a falling net long position.
What I’d like to get and what I ultimately get are often two different things. “You’d be wise to embrace that fact.”
While I don’t know how Dalio explains how he uses volatility as a leading indicator in his #process yet (I’ll know once I get to that part of the book!), this is where I’m most interested in learning from someone who is 26 years older than I.
To me, what I had no clue on 10 years ago (but somehow got lucky enough making money in markets anyway) is where I spend the most of my incremental time these days - sequencing the volatility of volatility.
That’s a lot less trivial than measuring and mapping the rate of change in something like say the profit cycle. Ideally, I’d like to “systemize my decision making” (another Dalio principle) on both the fundamental and quantitative research fronts.
Since I only have 12 minutes left to write to you this morning, I’ll finish up with what’s easier than a deeper discussion on the relationship between price, volume, and volatility. Here’s your Profit Cycle (Earnings Season) real-time Update:
- 138 of the SP500’s companies have reported aggregate year-over-year EPS growth of +11% for Q417 to-date
- 26 of the Nasdaq 100 names have reported aggregate year-over-year EPS growth of +33% for Q417 to-date
- 277 names in the Russell have reported aggregate year-over-year EPS growth of +22% for Q417 to-date
In rate of change speak, that means that “Tech Earnings” are still #accelerating vs. their +23.7% Q317 growth rate. Since that was the recent peak of the profit cycle, accelerating above and beyond that has been impressive, to say the least.
While I wouldn’t characterize yesterday’s tiny dip in Tech as an obvious “correction” to buy with both hands like the one we signaled buy on in December, the systematic part of my #process tells me to tell you that. It’s not a qualitative opinion.
Our immediate-term Global Macro Risk Ranges (with intermediate-term TREND views in brackets) are now:
UST 10yr Yield 2.57-2.71% (bullish)
SPX 2 (bullish)
RUT 1 (bullish)
NASDAQ 7 (bullish)
Biotech (IBB) 114-120 (bullish)
Nikkei 232 (bullish)
DAX 13156-13563 (bullish)
VIX 10.01-14.57 (bearish)
USD 88.52-90.97 (bearish)
EUR/USD 1.21-1.24 (bullish)
YEN 108.01-111.08 (bullish)
GBP/USD 1.38-1.42 (bullish)
Oil (WTI) 62.80-66.65 (bullish)
Nat Gas 2.99-3.41 (bullish)
Gold 1 (bullish)
Copper 3.12-3.24 (neutral)
AAPL 166.80-173.84 (neutral)
AMZN 1 (bullish)
FB 180-193 (bullish)
GOOGL 1130-1205 (bullish)
NFLX 248-298 (bullish)
TSLA 337-359 (bullish)
Bitcoin 96 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
