“He will win who knows when to fight and when not to fight.”
- Sun Tzu
Did you de-risk your gross long exposure to either big cap growth or Tech on yesterday’s bounce? Consensus didn’t.
Back to the Global Macro Grind…
Whether you needed to read Goldman’s note yesterday about “no sign of de-risking as hedge funds bought the dip in US Equities”, or you already knew that because you measure and map the data, deliberately, and daily… just know the crowd is still big time long.
Even though I have no fundamental reason to short Tech in #Quad3, my quant signaling process is suggesting I should consider it!
Bottom up, we have plenty of Ami Joseph Tech Stock SELL ideas that are working. But, top-down, from an Asset Allocation perspective, all I’ve done was take down my gross long exposure to Tech (pre the draw-down). I didn’t short AAPL, XLK, or QQQ.
Other than particular Tech companies #slowing and/or guiding lower in Q3, what fundamental Quad would have me short Tech?
A) Deep #Quad3 or
B) #Quad4
With everyone’s brother, sister, and dog trying to “rotate” into a #Quad2 portfolio of SMALL CAPS (IWM) and Financials (XLF) + Leverage, it probably rings a bell in your head when I remind you of the risk of the probability rising for #Quad4 in Q4 of 2020.
#Quad3 in Q3 of 2020 may have been priced when Tech and Commodities were at their AUG highs (i.e. with only a month left in Q3). If this recent draw-down in Oil is a precursor for more deflation, from here, it wouldn’t take much to get a #Quad4…
So, that’s something to think about. Knowing when not to buy-the-damn-dip matters.
The good news (for me) is that’s not yet happening this morning. I’ve got:
A) Down Dollar this morning, after it tapped the top-end of it’s @Hedgeye Risk Range yesterday… and
B) I have Oil Volatility (OVX) < 54, which is bullish for the Oil price, albeit tentatively!
C) I have a broadening of Commodity Inflation with Wheat +0.7%, Cotton +0.7%, and Silver +0.4%
Altogether, I’m much more constructive on Gold and Silver than Tech (XLK), mainly because the market’s volatility signals are. Gold Volatility (GVZ) dropped towards 21 yesterday and my Gold Miners (GDX) loved that.
In both the last month and week, these Gold and Silver positions have been major stabilizers in a fully allocated #Quad3 portfolio relative to being grossly exposed to AAPL Volatility (VXAPL) breaking out to the upside alongside NASDAQ Volatility (VXN).
What’s most interesting to me today about the gross long exposure that both hedge funds and Hoodies have to AAPL is:
A) AAPL Volatility just corrected from 67 last week to 55 yesterday
B) But AAPL’s vol of vol Risk Range is still 50-69!
C) And AAPL now has an implied volatility DISCOUNT of -8% vs. 30-day realized vol!
Points B and C get exclamation marks because relative to itself (which is pretty much all that matters to me in risk space), major moves just happened (as in yesterday), renewing the epic complacency of both AAPL Longs and its impact on the broad US Equity Indices.
After a volatility move like that, how could the complacency come back so quickly? I don’t know. I’m not the one who bought massive Short-Dated Call Spreads in both AAPL and QQQ, after the move, yesterday. Some hedge funds (or Softbank, ha!) did!
Obviously both the pace and volume of Short-dated Call Buying is both speculative and bubbly. A lot of people whine about this being just the Hoodies (or Retail Investors). It’s absolutely not. There’s been a big time Institutional bid for it.
Is this chasing of price momentum an investing style that’s consistent with hedge fund behavior since The Machine really started mowing down “Value” and RV Macro Hedge Funds from Q4 of 2016 to Q3 of 2018? A: Absolutely.
It’s also why Levered Long Momentum hedge funds have been train wrecked every time we get a #Quad4? (see Q418 for details)
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.60-0.74% (bearish)
SPX 37 (bearish)
RUT 1 (bearish)
NASDAQ 10,706-11,539 (neutral)
Tech (XLK) 111.08-120.98 (neutral)
Financials (XLF) 24.30-25.63 (bearish)
Shanghai Comp 3 (bullish)
VIX 26.01-35.49 (bullish)
USD 91.92-93.59 (bearish)
Oil (WTI) 36.45-41.26 (neutral)
Gold 1 (bullish)
Silver 26.01-28.93 (bullish)
Copper 2.95-3.09 (bullish)
MSFT 199-216 (neutral)
AAPL 110-124 (neutral)
Bitcoin 9713-11,047 (neutral)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
