“The geometry of curved shapes only takes us so far.”
- Steven Strogatz
And… the centrally-planned government bounce… free (falling) markets, eh?
If the Fed’s panic-cut didn’t get it done, surely they greatest stock market Tweeter-in-chief of all-time can get us a day of “major announcements.” Will a payroll tax cut have a longer shelf life than rate cuts? People who just got pounded by #Quad4 need one.
Including the relationship between price, volume, and volatility, “we also need to know how things move in this world – how human tissue shifts after surgery, how blood flows through an artery, how a ball flies through the air…” (Infinite Powers, pg 57)
Back to the Global Macro Grind…
Ex-the-“liquidity” that was supposed to make “Credit different this time” (High Yield OAS Spread widened way out to +640bps over yesterday in a market that looked pretty illiquid to me!), we still have to solve for macro market motion this morning.
My son, Jack, is in the Archimedes Math Bowl this morning. Best of luck little buddy! Dad has to risk manage this puppy instead.
The aforementioned Strogatz quotes sets up an excellent chapter in Infinite Powers titled “Discovering The Laws of Motion.” For those of you who have friends that still think governments and central banks can bend and smooth economic gravity, it’s a good read.
While I’m not sure where the precise point is that I start selling again today or tomorrow (or the day after that), I am certain that I will be making short sales in Sector Styles & Factor Exposures that are SELLs in #Quad4. Bear markets always bounce.
The only 2 shorts I didn’t cover in Real-Time Alerts yesterday were:
A) Levered Loans (BKLN) and
B) Junk Bonds (JNK)
My main concern with both is the borrow. I don’t trust that Old Wall has my back on allowing me to get in/out of those short positions as easily as I could 1-month ago. So, until either the macro data or my market signaling process says to get out, I’ll stay short.
While a Payroll Tax Cut sounds awesome for anyone who can get it (good for election votes too, eh), what neither Trump nor The Fed can do is un-cut the cuts that are already lacerating corporate profits in both Q1 and Q2.
While this might be breaking news to those who are new to where we are in The Cycle, at full-employment, the neither Trump nor The Fed can cut people’s wages either.
Back to the risk management of it all…
A) PRICE – SMALL CAP “stocks” (IWM) were down -9.4% on the day yesterday, taking the Russell 2000’s stock market crash to -24.5% from where The Cycle peaked in Q3 of 2018; Energy (XLE) and Financials (XLF) crashed, -20.1% and -10.7% on the day
B) VOLUME – Total US Equity Volume #accelerated +41% vs. the 1-month average yesterday
C) VOLATILITY – front-month VIX ramped towards 58 intraday and closed at 54.46
If VIX > 31 is bad and un-investable, VIX > 41 and VIX > 51 gets Trump thinking he’s got to be The Fed or he’s …
For those of you who are fractal fans and now understand the similar sets of a #accelerating volume (during market crashes) and pervasively high volatility, what you should really care about is what gets the VIX back below 31.
If that happens, what do you think I’m going to do?
Remember in early January when I was long of Oil and Energy Stocks? Remember what I did when my vol of vol signal signaled a Phase Transition through Oil Volatility’s 38 level? Oil Volatility sky-rocketed to 115 yesterday.
Anyone can get you “into” an invested position or asset management product. Who has a risk management process to get you out?
To be clear, I don’t want to anchor my entire multi-factor, multi-duration, global macro risk management process on something trivial like VIX > 31, but since it seemed to simplify the complex for many of you, I’ll stay with that “signal”, for now…
Today’s vol of vol (volatility of volatility) @Hedgeye Risk Range for front-month VIX = 32.03-58.48.
What that tells me is:
A) The low-end of my Risk Range is > 31
B) The top-end of my Risk Range is > 51 and would be another higher-high
Yep, US Equity Futures are currently up +4-4.5%, but the top-end of my Risk Range is +6.5% higher (2924) from yesterday’s close. That market price would be a gift, for those who didn’t sell on CNBC’s “Biden Surge” last week.
Selling bounces in a developing bear market is a skill. You need a non-linear process for that.
Obviously if you lose -20% of your money in something you need to be up +25% to get back to break-even. Part of why people are forced to sell bounces is a behavioral loss-aversion reality too don’t forget.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.49-1.01% (bearish)
UST 2yr Yield 0.26-0.74% (bearish)
SPX 2 (bearish)
RUT 1 (bearish)
NASDAQ 7 (bearish)
Utilities (XLU) 61.36-69.81 (neutral)
Tech (XLK) 80.95-89.75 (bearish)
Nikkei 192 (bearish)
DAX 102 (bearish)
VIX 32.03-58.48 (bullish)
USD 94.73-97.75 (neutral)
Oil (WTI) 27.10-39.54 (bearish)
Nat Gas 1.56-1.92 (bearish)
Gold 1 (bullish)
FB 162-187 (bearish)
GOOGL 1 (bearish)
Bitcoin 7 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
