“I realized that the world needed Mandelbrot-style-power-law or scalable distributions.”
- Nasim Taleb
Six days ago, I realized something non-linear was going on with my health. It’s a good thing I got tested, self-isolated, and spared my family and loved ones from testing positive. Just like market volatility, my peak-symptoms-day wasn’t fake news.
For those of you who believe in risk managing both your health & wealth using modern day science and fractal math (instead of biased, political, and/or hopeful narratives), the aforementioned quote comes from one of the few market practitioner’s “textbooks” you’ll find in finance on risk-adjusting your portfolios for volatility called The Volatility Surface, by Jim Gatheral.
Not unlike this virus, volatility has a variety of asymmetric outcomes. I feel blessed to be on the right side of it this morning. My sincere thanks to all of you for all of your emails and tweets. Hedgeye Nation gave me strength and confidence.
Back to the Global Macro Grind…
One of the things that’s happened to me during my COVID isolation is that I had time to review some of the foundational assumptions in my process. Gatheral’s book is one I haven’t written about in a while. I’m locked in my library, eh!
While many of the people you compete with, daily, on the bid/ask for asset prices still only stare at a single factor moving average of the price, remember that those who consider the volatility of the price don’t look at it the same way either.
Especially when pricing options, many use linear, or bell-curve, assumptions for the “upside/downside” in market prices. That’s absolutely NOT the way to consider volatility. Like everything else we measure and map, I model it stochastically.
What does stochastic mean? A: randomly determined.
If, for whatever reason, I wanted to tell myself a story of not getting covid, “because… blah, blah, blah… and from a valuation perspective, I really have little downside risk because of blah, blah, blah…”
Just think about your health & wealth the same way, for one more second this morning. I beg you.
Once you embrace that breakouts in market volatility are episodic and non-trending MOST of the time and clustering and TRENDING some of the time, you’ll be closer to thinking about risk the way I do.
The good news is that I’m not alone. Whether they’re modeling volatility stochastically or not, most people who are trying to test the boundaries of nature respect that risk happens slowly sometimes, then all at once.
The risk that you see in the largest Mega Market Cap Bubble in US history this morning should surprise no one. #NazVol (NASDAQ Volatility) closed at 40.08 yesterday and QQQ had an implied volatility PREMIUM of +32% vs. 30-day realized.
Unfortunately, I don’t have time to explain why A) this Regime (i.e. TRENDING Vol) of MEGA CAP Volatility isn’t new as of this week and/or B) why Gold Volatility looks nothing like it this morning… but I will give you what were my Top 3 Things:
- USD – over-owned Mega Cap Bubbles in a very concentrated basket of US stocks aside, there’s plenty of “market share” for Full Investing Cycle & Globally Diversified portfolios in (post-election, MMT) Dollar Devaluation investments… and USD gave us a big immediate-term TRADE #overbought signal vs. Euros, Pounds, and Swiss Francs in particular yesterday.
- GOLD – TAAS (there are alternatives to SPY) Investors finally got a big immediate-term TRADE #oversold signal in Gold (commensurate with the USD #overbought signal) yesterday; Gold Volatility of 22 looks nothing like the VIX or VXN, and that’s the point with Gold’s vol of vol signaling immediate-term upside in the Gold price towards $1940/oz.
- #NazVol – there’s an obvious reason why the only US Equity Index and/or Sector ETF I am long (Utilities, XLU) in size isn’t something with a Volatility of 40 like NASDAQ’s Volatility is! Before you sell AFTER another -10% drawdown, remember that it would be really hard for #NazVol to sustain a move > 45 – this morning should be short-term capitulation.
“Short-term capitulation” means that many people who didn’t take their GROSS LONG EXPOSURE to The Bubble down since The Bubble peaked in AUG 2020 will be selling lower this morning.
Buying Asset Classes (like Commodities, Emerging Markets, etc.) that are inversely correlated to the US Dollar continues to make sense during #Quad3 (which has a probability of 49.5% vs. 45.4% for #Quad4 in the USA this AM)…
As does me ending this note here. All of the work that matters from here (do I buy QQQ today? for example) has to do with the instantaneous and/or “local” volatility that is born out of this new market day.
I, for one, am grateful to have an opportunity to risk manage it.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.73-0.88% (bearish)
SPX 3 (bearish)
RUT 1 (bearish)
NASDAQ 10,968-11,557 (neutral)
Tech (XLK) 109.71-117.14 (bearish)
Utilities (XLU) 62.31-65.44 (bullish)
Financials (XLF) 23.17-24.56 (bearish)
DAX 114 (bearish)
VIX 28.24-40.35 (bullish)
USD 92.31-94.11 (bearish)
EUR/USD 1.166-1.191 (bullish)
USD/CHF 0.90-0.92 (bearish)
Nat Gas 2.71-3.49 (bullish)
Gold 1 (bullish)
Copper 3.01-3.21 (bullish)
MSFT 198-211 (bearish)
AAPL 108-118 (neutral)
FB 259-293 (bullish)
GOOGL 1 (bullish)
NFLX 463-510 (bearish)
Bitcoin 12,801-13,998 (bullish)
Best of luck out there today,
Keith R. McCullough
Chief Executive Officer