“As von Neuman knew, the human always gets in the way of the mathematical model.”
- Maria Konnikova

Why are they so unaware? How can measured and mapped (cross-asset-class) risk management signals be staring us right in the face while CNBC anchors get giddy about green on their US stock market futures screen?

If you polled 100 people who frequently appear on Old Wall TV and asked them who John von Neuman was, how many would get that right vs. the large % of them who could tell you exactly where the 50-day Moving Monkey for AAPL is?

It’s a good thing von Neuman (arguably the most important mathematician of his time) didn’t think in terms of the simple moving average of the surface area of things. In both nature and markets, the last thing to cave in is the surface.

#Quad4 Signals Flashing - 09.30.2020 debate aliens cartoon

Back to the Global Macro Grind…

Not unlike anything else in real-life (let’s use a big volume, fast current, river-bed this morning) that is hostage to the forces of gravity, staring at the surface of the Dow, in points, really isn’t very bright.

Like PRICE/VOLUME/VOLATILITY, whitewater rapids have ROCKS/CURRENTS/TURBULENCE. If you’d like to put your children on a raft ride down parts of them because they look nice from the plane you flew in on, I recommend prayer.

Why do so many people prefer to hold a static-surface-area view of price and valuation?

I really don’t care why. Perversely, I need a LOT of people to remain gainfully employed thinking about real-life risk (drawdowns of their hard earned capital) that way in order to get paid as a Class IV river guide.

Class IV (big water!) = #Quad4.

What signals are flashing on that front this morning? In our Q4 Macro Themes presentation (ping us if you’d like to subscribe and watch the replay – the content is both timely and topical), I zoomed in on 3 real-time indicators:

  1. US Dollar Index
  2. Oil (WTI)
  3. NASDAQ Volatility

So, as I was having my coffee, looking at the current this morning, this is what I observed:

  1. USD Index signaling a BIG higher-low in my Risk Range of 93.01
  2. Oil deflating another 1% after failing to hold @Hedgeye TREND signal support
  3. #NazVol went out at 35.42 last night signaling a vol of vol of 33-38

For those of you who have never been white water rafting, vol of vol of 33-38 is more like the Class VI rafting I used to do as a younger, single (without kids) man, on the Upper Gauley in West Virginia. I almost died.

If you didn’t know that and you’re going to chase into the boat with your bikini on and some beers, buying AAPL at the top-end of my Risk Range ($118) this morning, I will, again, pray for you too.

Remember when I explained why both the NASDAQ and AAPL were signaling immediate-term TRADE #oversold at $105? Good. Because it’s the same risk management #process that’s telling you to paddle the other way:

  1. AAPL Risk Range = $104-118
  2. Apple Vol = 48
  3. AAPL vol of vol signal = 46-58

In other words, if USD continues to make a series of higher-lows… if Oil remains Bearish @Hedgeye TREND… the probability of AAPL going back to $104 is high and rising.

Put that in your Morgan Stanley AAPL analyst spreadsheet and get Mike to get us the 200-day while they’re at it.

Another concept real Risk Manager river guides get is measuring stream flow. You don’t have to be one to conceptualize the potential outflow in both AAPL and MSFT if their respective volatilities remain in the 40-60 range!

What’s also particularly interesting to note this morning are the particularly complacent implied volatility readings of the AAPL & MSFT waters:

A) AAPL’s implied volatility just dropped to a -15% DISCOUNT vs. 30-day realized
B) MSFT’s implied volatility just dropped to a -14% DISCOUNT vs. 30-day realized

Remember, DISCOUNTS = complacency (after rallies). PREMIUMS build as risk does (during corrections).

It didn’t take long for all of the Macro Tourists to flip upside down in the water and drawdown the river in to mid-September. It’s a good thing we just had another month-end markup and nobody died.

Everyone on CNBC “feels” safe again.

Immediate-term @Hedgeye Risk Range with TREND signal in brackets:

UST 10yr Yield 0.63-0.71% (bearish)
SPX 3 (bearish)
RUT 1 (bearish)
NASDAQ 10,513-11,281 (bearish)
Utilities (XLU) 56.90-59.73 (bullish)
Financials (XLF) 22.77-24.60 (bearish)
DAX 124 (bearish)
VIX 24.99-29.95 (bullish)
USD 93.01-95.10 (bearish)
GBP/USD 1.26-1.29 (bearish)
Oil (WTI) 38.01-41.17 (bearish)
Gold 1 (bullish)
MSFT 197-213 (neutral)
AAPL 104-118 (neutral)

Best of luck out there today,


Keith R. McCullough
Chief Executive Officer

#Quad4 Signals Flashing - Chart of the Day