“The team uncovered predictive effects related to volatility.”
- Greg Zuckerman
After the best day for the US stock market since the Great Depression, you’ll hear plenty of theories and narratives on what happens next. For those of us with a data-driven and rules-based #process, today is just another day where we’re solving math problems.
The aforementioned quote comes from The Man Who Solved The Market. “How do we pull the trigger?” (Jim Simons asked Laufer). Simons started calling it his “betting algorithm” and “Laufer decided it would be dynamic, adapting on its own along the way and relying on real-time analysis to adjust the fund’s mix of holdings given the probabilities of future market moves.” (pg 144)
And people wonder why Simons’ Medallion hedge fund has been smoking Captain Stock picker hedge fund managers for decades now. The Machine has no “feelings” when it makes decisions. To the extent you can fade your own visceral reactions to The Crash of 2020, I highly recommend it.
Back to the Global Macro Grind…
Rising volatility drives a predictable and emotional response in human beings. It also drives fund flows. Asset allocations flow towards asset classes that have low and falling volatility – they flea those with high and rising volatility.
If that wasn’t true, everyone on the clown show at CNBC would be telling you Oil has “bottomed” this morning. With Oil Volatility at 170, that won’t be Cramerica’s call of the day. At VIX > 71 again, he’ll be begging Pelosi for the next bailout package too.
So when do you “pull the trigger” and buy some “stocks”? In some way or another almost every email exchange or Institutional client call I’ve had for the last month has centered around that question. My answers have been clear. But, post a 2-day bailout bounce, I’ll have to repeat myself.
I’m focused on the next spot to get aggressive again, shorting stocks.
If some of you think that sounds mean, I hear you. But I’d rather “sound” like something than have to explain to someone how I just lost 25-50% for their retirement nest egg. Yesterday’s +9.4% SPY bounce was nice, but it needed to be up +25-40% to get many people back to break-even.
I thought +9.4% was underwhelming relative to the +11.1% the @Hedgeye Risk Range math was suggesting was probable.
Maybe we’ll see the rest of that bear market bounce this morning (top end of my Risk Range implied another +2.7% upside from yesterday’s close). Then what? I also have -13.4% downside from SPX 2447 as probable in the immediate-term too, don’t forget.
Q: What would change that math? A: Re-entering an investable regime of US Equity market volatility. Did that happen yesterday?
- No, cross-asset-class volatility remained in the wrong “vol bucket”, signaling a Deep #Quad4 in the months to come
- US Equity Vol (VIX) actually made a series of higher-lows throughout the day as CNBC fans chased their fav “stocks”
- High Yield OAS Spread barely came in closing at +1,079 over, reiterating our Short Junk (JNK) and Late Cycle Credit call
Gold had an awesome day, but it’s volatility signal didn’t change either. Gold Volatility (GVZ) closed at 40 and Treasury Bond Vol (the MOVE Index) closed in the wrong bucket too at 111.
I’m pretty sure most Macro Tourists who only talk “stocks” haven’t the faintest idea what GVZ, OVX, and the MOVE are. That is totally cool with me. That’s what makes a market. Without a post-bubble consensus of bulls, we don’t get these epic bounces to sell into.
What if QE Infinity + $2.5T in Bailouts actually works? Well, A) I’ll score that mathematically instead of qualitatively and B) if we did just re-enter the next economic expansion and bull market in high beta stocks, I’ll be long them within a month anyway, eh!
In the meantime, I’ll be selling into this. Here’s a diversified basket of some immediate-term TRADE #overbought signals:
- Investment Grade Credit (LQD)
- German Stocks (EWH)
- Semiconductor Stocks (SMH)
If you’d like to diversify your short-selling basket into other widely held baskets of “secular growers” that are currently Cyclical Slowers, Adobe (ADBE) is the top weight in what still looks like a Software Bubble basket of stocks to me (IGV).
If you’d like to double-dip and short widely held Microsoft (MSFT), which is the #2 holding in the IGV basket, you can re-short the Tech (XLK) ETF today which has a 20% holding in the most widely owned stock in human history, Apple (AAPL).
“Great companies” some of these are, indeed. But it’s not a great time to be complacent or emotional about holding them. Selling what everyone still owns is a bear market strategy. Implied Volatility on XLK is trading at a -35% DISCOUNT to 30-day realized this morning. That’s a SELL signal.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.65-1.23% (bearish)
SPX 2144-2514 (bearish)
DAX 87 (bearish)
VIX 49.51-87.95 (bullish)
USD 98.35-105.44 (bullish)
Oil (WTI) 18.78-27.18 (bearish)
Gold 1 (bullish)
AAPL 215.23-254.84 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
