“In trading, you have to be defensive and aggressive at the same time.”
-Ray Dalio
“If you are not aggressive, you are not going to make money… and if you are not defensive you are not going to keep money.” –Ray Dalio, Principles (pg 18)
Back to the Global Macro Grind…
After a market move like yesterday’s, there shouldn’t be many words this morning. There should be a lot of process. There should be a lot of real-time measuring and mapping of price, volume, and volatility.
There shouldn’t be any emotion. What you “feel” this morning could be one of the biggest risks of them all.
I’m not suggesting that you won’t feel anything. You are human. The machines are not. Most that operate on a “rules-based” risk management system got stopped out of US equity positions on yesterday’s breakout in volatility.
Then the volatility spike triggered more equity selling in Asia overnight and again in Europe this morning.
All the while, the:
A) FX market
B) Commodity market
C) Rates market
Did little to nothing at all this morning…
That’s interesting obviously… because 2 of the causal factors that drove US Equity Volatility were:
- USD signaling immediate-term #oversold during Davos week while running a 93% 30-day inverse correlation to SP500
- Rates (both 2s and 10s) ramped to immediate-term #overbought on the US Wage Inflation #acceleration on Friday
You also had the NET LONG position in S&P500 Index + E-minis (futures & options contracts) hit its highest level in 2 years last week at +187,698 contracts (as of last Tuesday’s close). That scored +1.73x on a 1-year z-score.
So, when you put the fundamental USD and Rates factors in the context of market positioning:
- US stocks were at the very TOP of the @Hedgeye Risk Range in the last week of January… and
- Consensus was forced to chase (get extra net LONG) AFTER the biggest JAN gain in the SP500 since 1997
The rest is history. So is the time that front-month US Equity Volatility (VIX) spiked to this 40 level in 2015. Back then, the causal (fundamental fear) factor was the re-emergence of DEFLATION. This time, it’s INFLATION. Go figure.
Another way to contextualize this move in volatility is sequencing where implied volatility just moved to relative to what’s already been realized. We measure and map this, daily, so it’s easy to consider with no emotion this morning:
- SP500 implied volatility just ripped to a +85% PREMIUM vs. 30-day realized
- Nasdaq (QQQ) implied volatility just ripped to a +63% PREMIUM vs. 30-day realized
- Tech (XLK) implied volatility just ripped to a +93% PREMIUM vs. 30-day realized
Don’t forget that “what’s already been realized” in US equity volatility terms was the ALL TIME LOWS. We score all-time as a very long time. So a volatility cluster like this should be considered epic relative to anything we’ve ever seen.
What makes it stop?
I don’t know. Heck, it might not be ending right now. It might start to TREND and become the literal beginning of the end of both the bull market and economic cycle. These things feed on themselves, reflexively, don’t forget.
Oh, and heck yeah, the volatility spike might be ending right now. Imagine that, people selling low after chasing higher (again).
Since a trigger for the selloff was that the economic data (and interest rate read-through) was too hot, I doubt we’re on the precipice of the economic disaster that so many have lost so much trying to call for the last year.
But my doubts shouldn’t add up to much because they consider my subjectivity. And my opinion means very little to me right now relative to measuring and mapping both the data and Mr. Market’s signals.
On that front, I’ll be squarely focused on the Nasdaq Composite Index @Hedgeye TREND support level of 6951. Breaking down through that with a more pervasive (sustained) breakout in volatility would be outright bearish.
Monitoring my @Hedgeye TREND signals across most of the big stuff in macro is easier than listening to a pundit and/or an emotional boss this morning. I have BULLISH or BEARISH TREND in brackets alongside my refreshed @Hedgeye Risk Ranges here:
UST 10yr Yield 2.61-2.91% (bullish)
SPX 2 (bullish)
RUT 1 (neutral)
NASDAQ 6 (bullish)
Biotech (IBB) 104-120 (bullish)
XOP 35.13-40.81 (bullish)
RMZ 1031-1109 (bearish)
Nikkei 210 (neutral)
DAX 124 (bearish)
VIX 11.65-39.36 (bullish)
USD 88.31-90.36 (bearish)
EUR/USD 1.22-1.25 (bullish)
YEN 108.02-110.81 (bullish)
GBP/USD 1.39-1.43 (bullish)
Oil (WTI) 63.19-67.03 (bullish)
Nat Gas 2.70-3.32 (bearish)
Gold 1 (bullish)
Copper 3.13-3.25 (bullish)
AAPL 155.70-170.55 (bearish)
AMZN 1 (bullish)
FB 179-194 (bullish)
GOOGL 1160-1204 (bullish)
NFLX 238-288 (bullish)
TSLA 330-357 (neutral)
Bitcoin 65 (bearish)
Again, I have no problem going bearish on anything. I am not wed to being a US Equity bull inasmuch as I’m still not interested in telling you to buy any dip in European or Emerging market Equities (we’ve been bearish on both in 2018).
There are plenty of #GlobalDivergences (one of our Top 3 Global Macro Themes right now) to consider alongside this volatility cluster in the US stock market. There’s always a bull and a bear market developing somewhere.
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
