“The inquiry into nature is concerned with movement.”
- Aristotle
Movement can be very short-term (betting a 3-day Moving Monkey chart looks awesome right about now), intermediate, or long-term. While many a perma bull would love everything to be awesome across all durations, all of the time, that’s not market history.
As Richard Panek goes on to remind us in The Trouble With Gravity, “the motions of matter” mattered to Aristotle. “As was the case for mythmakers and storytellers of old, he needed a landscape of everything except what was essential to the universe.” (pg 36)
What’s essential to how I measure and map the Global Macro market universe is volatility. If the volatility of volatility doesn’t change, all my back-testing and experience risk managing bear markets says I shouldn’t change my positioning.
Back to the Global Macro Grind…
I had a terrible day yesterday. They happen, especially after a great 2 months.
For 2 months, the US stock market couldn’t put together back to back up days of consequence. Why? Well that’s pretty straightforward – we were in what I’ll call a Trumpian Phase 1 of a US stock market crash.
After consensus is done with their “re-balancing” narrative today (imagine taking people out of Treasuries and putting them into stocks here? Wow), let’s call the next probable -15-20% in US “stocks” Phase 2. I have down -16.3% in my SPY Risk Range today alone.
Notwithstanding the epic quantified complacency I’m looking at from an implied volatility perspective this morning:
- SP500: Implied Volatility went out at a -33% DISCOUNT vs. 30-day realized last night
- RUSSELL: Implied Volatility went out at a -33% DISCOUNT vs. 30-day realized last night too
- ENERGY: stocks (XLE) have a -43% DISCOUNT vs. 30-day realized!
Anyone want to buy some Commodities, Oil, or Energy Stocks as we enter the deepest #Quad4 of your career this morning?
With Oil Volatility (OVX) at 150, and immediate-term downside in WTI to $19.59, I’m thinking probably not. How about the Energy component of High Yield or Junk Credit? With High Yield Spreads barely coming in to +959 over yesterday, I’m thinking prayer on that.
Let me guess, you have friends that know not to buy that – they all know to buy what everyone else already owns – some “Secular Growers”… you know, the ones that are currently seeing the fastest advertising and consumption slow-down in modern US history!
No worries, Tech (XLK) has an implied vol DISCOUNT of -37% this morning too, so that’s not complacency 101 either, is it?
The problem here is the same problem that many PMs had during Phase 1 of The Crash of 2020. They’re using the same playbook that got them paid handsomely in a bull market. But this isn’t a bull market anymore.
Before you stop reading because you want this bear/crashing market to end as soon as it started, bear with me and review the history of recessions and their commensurate bear markets:
A) As you can see in today’s Chart of The Day – Bear Markets Don’t End Abruptly
B) On peak to trough GDP declines of -18-27% the duration of Bear Markets are either 34 or 61 months
C) On the peak to trough GDP #slowdown post 9/11 of -0.3%, the Bear Market lasted 31 months
But many of the questions in my inbox want this one to last 1 month! Even our #Quad4 US Equity Beta crash call of Q4 of 2018 lasted 3 months (and that was during an economic expansion!).
‘Oh but KM, you suck man. You didn’t go bullish on my favorite stocks on December 24th of 2018, so you’re going to be wrong again as I buy more of my FB and GOOGL, you’ll see…’
To be fair, that’s more like the feedback I get on Twitter from the 100% of people who have never built a company model in their life who are long a bunch of story stocks in their Robin Hoodie accounts.
‘But, but, The Fed… and The Fiscal… and The Rebalance’…
Yep, got that. That’s all in the market’s last price though. And the SP500 and Russell 2000 are still in crash mode, down -22.3% and -32.2% from their cycle highs, respectively AFTER the Fed ramped its balance sheet to $5.3 TRILLION this week (up +$586B on the week)!
On down -15-20%, from here in SPY for example, I have a few risk management questions for my nameless Twitter friends:
A) If I take the mid-point of -15-20% and add that to the crash SPY is already in, that’s -39.8% from The Cycle Peak
B) The average SPY Drawdown in a bear market is -39%
C) The MIN/MAX is -20% to -86%
And the MIN (-20%) that we called in Q418 was just a run of the mill #Quad4 Growth Slowing from its Q318 Cycle Peak draw-down, not a recessionary one. If you want the down -22% (i.e. stop SPY from going down now) varietal, that’s 1 and it lasted 14 months.
We’re currently nowcasting down -24.85% q/q SAAR GDP for Q2 and will let you know if/when that changes. Historical context won’t. Yesterday’s Jobless Claims print of 3.3M won’t just go away with a bullish 3-day moving average either. It’s just gravity.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.62-1.05% (bearish)
SPX 2 (bearish)
RUT (bearish)
NASDAQ 6 (bearish)
Tech (XLK) 67.91-83.22 (bearish)
DAX 70 (bearish)
VIX 50.28-85.04 (bullish)
USD 97.75-105.17 (bullish)
EUR/USD 1.05-1.11 (bearish)
Oil (WTI) 19.59-25.39 (bearish)
Gold 1 (bullish)
Copper 2.01-2.27 (bearish)
FB 140-165 (bearish)
GOOGL 1027-1175 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
