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“Some would say this was the most volatile period ever.”
-Ray Dalio

That’s not a quote about today’s cluster of cross asset class volatility. Dalio was describing 1 “where the economy was in even worse shape than it was during the financial crisis of 2007-2008.” (Principles, pg 30)

This morning you’re seeing that the recent ramp in market volatility wasn’t a one-off. Dollar Up, Rates Up, Stocks (globally) Down is a reversal of what drove cross asset class volatility to its all-time lows in 2017.

Whenever we’re talking about the “all-time lows” or the most volatile period “ever”, we’re talking about a very long time. If you started buying stocks in the 1980s, you’re probably pretty happy right now. What if the upside down of that was JAN 2018?

Back to the Global Macro Grind…

Is Volatility Back? #Yep - 02.07.2018 volatility cartoon

I’m not trying to scare you this morning. I’m asking myself these questions because my quantitative signaling process is suggesting something might be changing out there in volatility space. Nothing concerns me more than a Phase Transition in trending volatility.

It’s not Macro Monday but it’s Day 1 of the US market week so it’s time to review what moved in macro markets last week within the context of intermediate-term @Hedgeye TREND views. 

First, was that it for Down Dollar? 

  1. US Dollar Index corrected another -1.5% last week but signaled its 1st higher-low in almost a year
  2. EUR/USD was +1.3% tapping the top-end of the @Hedgeye $1.21-1.25 Risk Range last week
  3. Yen strength continued to manifest, +2.4% vs. USD last week but signaling immediate-term overbought 

I don’t know if that’s it for Down Dollar. What I do know is that bottoms are processes, not points – and they almost always end with Consensus Macro Tourists being on the wrong side of the trade. 

The world is clearly short of Dollars and long of just about everything else you’d buy during a “Globally Synchronized Recovery”… just as both the economic data and market signals are telling us about #GlobalDivergences in both inflation and growth rates.

Down Dollar funded plenty of reflation and carry trades last week: 

  1. Oil (WTI) was +4.2% last week and remains Bullish TREND @Hedgeye (but is signaling lower-highs for 1st time since SEP)
  2. Gold was up another +2.6% last week and remains Bullish TREND @Hedgeye (but signaled immediate-term overbought)
  3. Copper reflated a big +6.7% last week but is down -1.7% this morning teetering on a TREND break-down
  4. Russian Stocks were up a big +6.5% last week on the Down Dollar, Up Oil move  and remain Bullish TREND @Hedgeye
  5. Emerging Market stocks bounced +5.2% last week and absolutely love the Down Dollar trade 

Down Dollar, Up Euro remained a headwind for the “relative value” trade that many continue to struggle with (Long European Value vs. Short US Growth) as most major European Equity markets under-performed the NASDAQ on the bounce: 

  1. EuroStoxx600 was +3.3% on the week to -2.2% YTD
  2. Germany’s DAX was +2.8% on the week to -3.6% YTD
  3. France’s CAC40 was +4.0% on the week to -0.6% YTD 

Those weekly and YTD returns stand in sharp contrast to: 

  1. NASDAQ +5.3% on the week to +4.9% YTD
  2. US Tech (XLK) +5.7% on the week to +5.1% YTD
  3. High Beta (as a US Equity Style Factor) +5.9% on the week to +2.8% YTD 

Another relative under-weight for us in Global Equities remains US Utilities (XLU) and even they bounced on our “Bond Yields #Overbought” signal (post the US CPI and PPI reports). Utes (XLU) were +3.2% last week to down -4.9% YTD.

Even though US Equity Volatility (VIX) got smoked for a -33% correction last week, the implied volatility DISCOUNTS in big things like the NASDAQ and SP500 got more and more negative into days 5 and 6 of the rally. That’s not good.

With the US Equity bounce coming on A) decelerating volume (Friday’s Total US Equity Volume including dark pool was -14% vs. the 1-month average) and B) front-month VIX still signaling it could go back to 35-36, I opted to send out sell signals in Real-Time Alerts. 

If or when I stop getting these sell-the-rip signals, I’ll be the first to let you know. For now though, US Equity Volatility is back to signaling Bullish TREND @Hedgeye.

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

UST 10yr Yield 2.77-2.93% (bullish)
SPX 2 (bullish)
RUT 1 (bearish)
NASDAQ 6 (bullish)
Energy (XLE) 66.01-69.88 (bearish)
REITS (RMZ) 1011-1060 (bearish)
Nikkei 206 (bearish)
DAX 120062-12599 (bearish)
VIX 14.35-35.33 (bullish)
USD 88.39-90.75 (bearish)
EUR/USD 1.21-1.25 (bullish)
YEN 105.93-109.12 (bullish)
Oil (WTI) 58.16-63.49 (bullish)
Nat Gas 2.46-2.80 (bearish)
Gold 1 (bullish) 

Best of luck out there this week,


Keith R. McCullough
Chief Executive Officer

Is Volatility Back? #Yep - 02.20.18 EL Chart