“The collection of all such implied volatilities is known as the volatility surface.”
- Jim Gatheral
Since my only big macro market bet on the US Election was for a Down Dollar, I didn’t have to spend the last 48 hours hoping for something like a “Blue Wave.” All I know about that… is it was the name of a hedge fund I worked at that blew up in 2007.
Back to the Global Macro Grind…
I’ll try to keep it tight for you this morning and summarize what I really care about: The Signal & The Cycle.
Evidently many Macro Tourists were chasing stock charts in their Hoodie accounts yesterday. So, they most likely missed what was happening in the Bond Market post two important cyclical economic data points for the month of October:
A) EMPLOYMENT – ADP Payrolls = +365k for OCT, missing “consensus” of +749k by a country mile
B) SERVICES – ISM Services #slowed to 56.6 to the lowest “level” since May
These are October numbers and COVID (in case you missed getting it like I did) obviously #accelerated into the back half of OCT and into early NOV. That future employment and profit cycle (negative rate of change) impact should matter, unless…
Wait on it…
You get another STIMULUS! Oh yes, gotta get to that new narrative with a Red Senate swamping Blue Wave positioning to be long Bank and Airline stocks, eh?
Uh, no. At least not yet. For now, the Global Macro Market just told you what to do with China in #Quad1 and USA in #Quad3:
- Short US Dollars
- Buy both China and EM (Thailand and Indonesia were up +4.5% and +3.0%, respectively, overnight)
- Buy Commodities (Rare Earths, REMX, ripping bro!)
- Buy Tech
- Buy Treasuries
Oh yeah, so much to buy – but not so much the things many political-theme-based peeps were looking to buy with a brilliant idea for a “steepening yield curve” and a “rotation out of Tech into Financials”… after believing the… wait on it… polls! Lol
I’m a go anywhere in macro guy. But if I was just a Fixed Income guy, I’d have been fired for betting on a steepener:
A) UST 10yr Yield just had one of its largest % drops in 48 hours, ever
B) The Curve just collapsed from +74bps wide (10s minus 2s) to +59bps!
Since I’m also a guy who loves to go both ways, eventually I’ll short Treasuries, Gold, etc. and bet on Real Rates Rising. That’s when The Signal & The Cycle (or The Quads) are telling me to pivot my Full Investing Cycle portfolio into #Quad2.
#Quad3 Economic Stagflation is awesome for my diversified macro portfolio. It’s terrible for no-to-low-income people who are going to have to pay for eating it (Corn and Wheat prices are inflating as much as SPY this AM btw, +1.3-1.8%, respectively).
Will the #Quad3 Tech Ramp surpass the all-time bubble highs of AUG 2020?
A) I don’t know … but
B) How low the US Dollar goes will absolutely impact the answer to that question
What the pace of this morning’s US Dollar Devaluation is telling you is that Bullish @Hedgeye TREND Commodities like Silver (+3%) and Bitcoin can go all Buzz Lightyear on the bears. Their US Dollar inverse correlations (Gold and Commodities too) are real!
What else will I be paying particular attention to probability-weight where markets go next? A: Volatility’s Surface.
That’s why I used Jim Gatheral’s simple quote as this morning’s opening volley. As many of you know “actual options prices rarely if ever conform to predictions” of Old Wall’s Black-Sholes formula…
“Because the idealized assumptions required for it to hold do not apply in the real world.” -The Volatility Surface, pg xxiii
In the real-world, I measure and map the vol of vol, or the volatility of volatility, instantaneously, just like we humbly accept all new economic data points, like good Bayesian boys, in our Quad models.
If #NazVol (NASDAQ Volatility) breaks my @Hedgeye TREND support signal, the probability goes straight up that Tech revisits her all-time bubble highs. If it doesn’t, it doesn’t. And Tech should rally to a big lower-high.
Gold and Commodity Volatility, on the other hand, are already flashing green @Hedgeye TREND lights for the bulls. That’s where even the “value” community must be loving those Election Results. Commodity Equities are “Green Wave” cheap!
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.71-0.91% (bearish)
UST 2yr Yield 0.13-0.17% (bearish)
SPX 3 (neutral)
Tech (XLK) 108.80-119.98 (bullish)
Financials (XLF) 23.22-25.38 (bearish)
Shanghai Comp 3 (bullish)
Nikkei 23044-24166 (bullish)
VIX 27.47-40.61 (bullish)
USD 92.33-94.10 (bearish)
USD/CHF 0.90-0.92 (bearish)
Nat Gas 2.91-3.44 (bullish)
Gold 1 (bullish)
Silver 23.19-24.99 (bullish)
Copper 3.03-3.17 (bullish)
MSFT 197-222 (bullish)
AAPL 107-120 (bullish)
AMZN 2 (bullish)
FB 260-296 (bullish)
GOOGL 1 (bullish)
Bitcoin 12,896-14,598 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
