“This clock time, often referred to as trading time, may be identified with the volume of trades.”
-Jim Gatheral
Was yesterday’s “rotation” A) due to God calling with a message that something was “overvalued” and something else was “cheap”, or B) was it a big volumetric wave signaling an economic Phase Transition?
Alex, in both memory and tribute to you this morning, I’ll take B) for all of my assets under management.
Back to the Global Macro Grind…
As Jim Gatheral goes on to explain in chapter 1 of The Volatility Surface, “the idea (with clock time) is that as trading activity fluctuates, so does volatility.”
While the interconnected relationship between PRICE, VOLUME, and VOLATILITY is a given in everything that I attempt to “see” in market moves, across asset classes, I’m quite sure that what I am looking at isn’t what CNBC is seeing this morning!
Whether these fake and/or Old Wall “news” outlets are screaming at you about “valuation” or the Moving Monkeys “breaking out” or “breaking down”, in Dow points, it should all just be white noise to you at this point.
What matters isn’t what people think is happening – it’s what is happening to PRICE, VOLUME, and VOLATILITY.
Across Factor Exposures and Emergent Properties, the US Equity market infrequently moves like it did yesterday. There was a LOT to it, so let’s just break it down with numbers instead of narratives:
- US Equity Volatility (VIX) sliced through @Hedgeye TREND support of 26, then ramped into the market’s close
- Total US Equity market volume was up an epic +50% vs. its 1-month average
- NASDAQ (-1.5%) and 4 US Equity Sector Styles were DOWN on the day with Communications (XLC) down -0.9%
This was perpetuated by:
A) FX: A US Dollar that had a textbook bounce off the low-end of the @Hedgeye Risk Range = 92.00-93.43… and
B) FI: A US Treasury Bond market that was in freefall with the UST 10yr Yield up +16 basis point in a day
What did I “see” in all of that?
A) The cross asset class read-through is the market voted early on our 2021 nowcast for USA being in #Quad2
B) The consensus read-through is that #NazVol (VXN) > 31 is unlikely to allow for an orderly “rotation”
Obviously The Machine can’t just “rotate” everyone out of AAPL and into Exxon (remember that company? It’s still around) in one day. It can certainly try to make you “feel” like it’s all going to happen at once, however. Bombs went off in P&L terms.
Your “feelings” are your enemy right now. So whether you’re super happy or sad about how yesterday played out, I’d check that emotional baggage at the door and remember that short-term moves mean revert, in the short-term.
If you disagree with that, something broad, like SPY, already disagrees with you:
A) If you chased SP on the open or 3626 just after the lunch-time lull…
B) You lost -2.0% of your money by yesterday’s close… and probably have some issues to deal with on the open
Since the all-time closing high for the SP500 was 3580, yesterday’s BIG VOLUME ramp to new intraday highs and reversal to close below 3580 at 3550 is called an Outside Reversal. They too, sometimes, signal Phase Transitions in @Hedgeye TRENDs.
But, but… I thought the big Phase Transition was towards #Quad2 (Long Bank Stocks and Short Treasuries)…
Yes, it could/should be in t-minus 1-week to 1-quarter from now. And, yes, we need to use stochastic volatility models to instantaneously try our best to time that transition. But, no, no, no… this:
A) Doesn’t ALL have to happen at once and …
B) It definitely doesn’t mean Mega Cap Bubbles and Bond Market Bubbles can’t implode in the meantime!
Bubbles? Oh, you didn’t forget about the world’s Asset Allocations to falling interest rates, bailout money, and #slowing (Stagflation) #Quad3 growth that peaked during Q3 of 2020, did you?
You didn’t think I was just going to lazily write you an Early Look that says BUY #QUAD2 NOW this morning, did you?
To be crystal clear, my plan was always to Phase Transition from #Quad3 in the USA to #Quad2 by some time in late 2020 and/or early 2021. I just didn’t think I’d have the Clock Time the vaccine news gave me yesterday.
Newsflash: neither did consensus US equity positioning or… more importantly, The Fed!
Oh, right, there’s that part of The Game clock to consider in this short-term OODA Loop too.
Do you think, after buying $120 BILLION in bonds per week, PE Powell and his boys can let the bubble in Credit implode because people want to chase cheap Energy stocks (which I’m now buying on dips) and sell AMZN like Bezos did?
And, as importantly, if the Fed doesn’t want to “let it happen”, you know it can still happen, right?
So I’ll leave you with the question in the title of this note this morning as a conclusion. Can the macro market handle #Quad2 breakout in the UST 10yr Yield (TREND = 1.02%) this AM or not?
If the answer is no, we’ll have plenty of clock time and short-term OODA loops to reset our positioning. Bullish or bearish, underweight your “feelings” and be very long of process & patience.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 0.74-0.97% (neutral)
SPX 3 (bullish)
RUT 16 (bullish)
NASDAQ 10,616-12,056 (neutral)
Utilities (XLU) 62.11-65.75 (bullish)
Financials (XLF) 24.40-27.56 (neutral)
Shanghai Comp 3 (bullish)
Nikkei 234 (bullish)
DAX 117 (bearish)
VIX 23.40-32.95 (neutral)
USD 92.00-93.43(bearish)
Oil (WTI) 36.18-41.31 (bullish)
Nat Gas 2.75-3.48 (bullish)
Gold 1 (neutral)
Silver 22.51-25.70 (neutral)
Copper 3.04-3.19 (bullish)
AAPL 105-121 (neutral)
AMZN 2 (neutral)
GOOGL 1 (bullish)
NFLX 458-499 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
