“He argued that he had found proof that the Earth did not revolve around the Sun.”
- Mario Livio
Imagine one had to “argue” that basic fact, for half a century, about gravity? And I sometimes struggle to convince people that volatility is the leading indicator for price!
Through measuring, mapping, and deliberate observation, Galileo wasn’t convinced about the centricity of “Value” or “Valuations” (Old Wall Earth) being at the heart of the universe.
In two letters that he wrote in 1597, “Galileo expressed for the first time his increasing conviction in Copernicanism provided for radical changes in his views.” -Galileo and The Science Deniers, pg 46
Back to the Global Macro Grind…
If you have friends who identify themselves as “growth” or “value” investors, that’s totally cool with me. I think I understand both disciplines because A) I’ve been both and B) over 20 years, I’ve taken the time to study and back-test both.
I’m neither a growth nor a value investor. I am a Full Cycle Investor who may be long or short those Factor Exposures.
What does that mean? It’s pretty simple, really. It means I have a go-anywhere risk management #process that understands the most basic gravitational force in Asset Allocation: money flows towards assets with falling volatility.
And, of course, money flees assets when the volatility of the asset’s price breaks out to the upside, on a trending basis.
What’s the number one signal for an asset to undergo this type of Bullish to Bearish Phase Transition (i.e. a breakout in volatility)? A: A series of lower-highs in the assets price combined with clustering volatility spikes. In fractal math we call these Similar Sets.
Guess what may (or may not) have just signaled one of those? A: The NASDAQ.
What the answer isn’t is the SP500 or the Russell 2000. Neither of those major US Equity Indexes ever saw their Bullish @Hedgeye TREND Volatility Regime break down other than for a few days around June 8th of 2020.
That’s when both SPY and IWM made big lower-highs after a short-term bottom in the US Dollar’s Bearish TREND.
That’s another Similar Set to be paying particular attention to this morning (and remember it’s not the “average” of things that matters in risk managing your money – it’s the particular): USD inverse correlations vs. Asset Classes:
- GOLD: 15-day inverse correlation to USD just ramped to -0.93
- SP500: 15-day inverse correlation to USD just ramped to -0.89
- COMMODITIES (CRB): 15-day inverse correlation to USD just ramped to -0.87
Again, these mathematical and risk management realities mean nothing to many classic Old Wall “growth” or “value” people. That’s why they generally miss The Flow part of what moves The Machine. I prefer to front-run it.
Yeah, many Perma Bulls want to (or need to) believe The Flow argument of “liquidity” and “don’t fight the Fed”, but not everyone wants to accept that the #1 threat to both the Fed and all of these “liquidity models” is The Volatility!
While I am sure they’ll have no responsibility in crowding consensus into a narrowing pipe of stocks with bubble market caps (5 stocks = 40% of the NASDAQ and 2 stocks = 40% of the Tech ETF, XLK)… that still happened.
And… now that that’s one of the most consensus net LONG positions in ALL of Global Macro (see non-commercial CFTC Futures & Options positioning data as today’s Chart of The Day), what could possibly go wrong on a breakout in NASDAQ Volatility?
What constitutes Bullish TREND Regimes in Volatility (bearish for price)?
- SP500 front-month VIX > 26
- Russell 2000 front-month RVX > 32
- NASDAQ front-month VXN > 33
These aren’t static risk management levels. Nothing in my process is static. Like gravity, everything moves with time and space.
Can Monday and today’s moves in “risk” be head-fakes? Sure. The move we saw on June 11th was one-time in nature for NASDAQ Vol. Mandelbrot would have called that day episodic and non-trending…
What if it’s not? Well, I (and thinking probably you) should be taking down my gross long exposure to both the NASDAQ and Tech (XLK) before both break @Hedgeye TREND support.
Another way to think about hedging #RiskRising in my long book is taking up the gross exposure in my short book. In addition to adding to my Financials (XLF) short position yesterday, my Top 3 Adds (in terms of size) were Junk (JNK), Russell (IWM) and Healthcare (XLV).
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.59-0.69% (bearish)
UST 2yr Yield 0.13-0.17% (bearish)
SPX 3114-3232 (bearish)
RUT 1 (bearish)
NASDAQ 10,207-10,684 (bullish)
Tech (XLK) 103.35-109.05 (bullish)
Financials (XLF) 22.19-24.20 (bearish)
VIX 26.18-33.57 (bullish)
USD 95.83-97.14 (bearish)
Gold 1 (bullish)
Copper 2.72-2.98 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
