“Using the fact that local variance is a conditional expectation of instantaneous variance…”
- Jim Gatheral
Nope. I do not expect the majority of you to know what to do with that opening volley. It’s from Chapter 3 of The Volatility Surface and, if there’s one thing I start with when I look at a market price, it’s that.
A simpler way to think about it (instead of using some 1990s, pre cloud, simple moving average of price) is to think about the volatility of a market price on a then vs. now basis.
What was volatility then and what is it now? As in right now. If you’re using stochastic models like the ones we’ve built @Hedgeye, you can approximate the shape of the implied volatility surface. Do that with Tesla (TSLA), right now!
Back to the Global Macro Grind…
Realizing that some of our subscribers want to understand HOW and WHY we do what we do here @Hedgeye, what I’ve realized over the course of the last 13 years building out the communication and content platform is super simple:
Most of you want to know WHEN I’m going to make a change in positioning!
That’s cool. I’m definitely not going to mince words or timestamps when I change my positioning. That said, I owe it to the many of you who are learning alongside me to keep trying to coach major inputs like the Vol of Vol.
The Vol of Vol, or the Volatility of Volatility, most certainly includes computing local, or instantaneous, volatilities from realized and implied volatilities. But I’ll stop there this morning and now start with what to do next.
What do you do with either Tesla (TSLA) #crashing from its recent peak or Momentum, as a Factor Exposure?
Well, let’s start with something very basic that differentiates Momentum (which just got hammered alongside TSLA) vs. HIGH BETA, as a Factor Exposure, which just had one of its best absolute and relative performance days of 2020:
A) Momentum = price momentum
B) Beta = is a measure of the volatility of the price
Looking at one Momentum Basket (MTUM), its largest weight, by far is Tesla (TSLA) at 7.5%.
Yes, widely held names like AAPL and MSFT are heavy weights in that basket (5% each) but names like NVDA and TMO are 3-4% weights that got absolutely smoked on both a relative and absolute basis yesterday as well.
Why? I personally don’t care so much about the WHY. I care about what A) already happened (i.e. THEN, as in yesterday and the day before that when TSLA signaled a BIG-Lower-High in my model) and B) what’s happening now.
What’s happening now is TSLA is slicing through my critical @Hedgeye TREND signal level of $761 support on A) accelerating volume and B) rising local volatility.
Need a Bloomberg narrative? The BMW CEO can tell you “why.” Does that help you? Lol
Again, I don’t care why. We’re long of Porsche (POAHY) which is signaling A) higher-highs on B) #accelerating volume and C) falling local volatility. They do EV, ESG, yeah you know me. Our Subs are happy with that jingle.
I’m not long Crowded Momentum like TSLA. But, yes, I’m long some Price Momentum via plenty of SPACs… and I’m long a lot of HIGH BETA exposure too. Let’s look at the Top 3 weights in that HIGH BETA basket:
- Occidental Petroleum (OXY)
- Apache (APA)
- Diamondback Energy (FANG)
Who’s long that FANG? Sadly, since most Hedge Funds blew out of their Energy Teams at the Deflation Cycle Lows, those 3 names are NOT Crowded Momentum Longs in either the fast or slow money portfolios right now!
Long Energy (XLE) was up another +3.5% for #Hedgeye Nation yesterday as the Vol of Vol of both the Commodities and the Stocks continued to break down as inflation itself continues to breakout alongside…
Drumroll, long-term bond yields!
Oh yeah, there was that going on in a Full Cycle Investors portfolio yesterday (i.e. THEN) as well with the MOVE Index (Treasury Bond Volatility) breaking out to a new #Quad2 Cycle High of 62.42.
Long Energy +3.5% on the day to +26.1% YTD vs. Short both the Long Bond (TLT) and Utilities (XLU) down another -2.0% on the day to -4.0% YTD? That Alpha Dog’ll hunt.
And if you’re using the TSLA/MTUM correction/crash as your latest narrative on the “stock market bubble and pending end of the world”, I’d be careful with that…
It was only at last month’s end (i.e. January, way back THEN) that HIGH BETA (specifically Energy Stocks) corrected, quickly, to the low-end of my Risk Range.
I’ll be buying some Momentum (QQQ and, Tech, XLK) on sale today like I re-loaded long Energy way back then too.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.18-1.41% (bullish)
SPX 3 (bullish)
RUT 2 (bullish)
NASDAQ 13,437-14,251 (bullish)
Tech (XLK) 132.09-139.41 (bullish)
Energy (XLE) 43.32-47.99 (bullish)
Utilities (XLU) 59.48-62.14 (bearish)
VIX 19.77-24.29 (bearish)
USD 89.80-90.91 (bearish)
Oil (WTI) 58.72-62.44 (bullish)
Nat Gas 2.72-3.22 (bullish)
Gold 1 (bearish)
Copper 3.74-4.15 (bullish)
MSFT 232-247 (bullish)
AAPL 125-133 (bullish)
AMZN 3120-3349 (neutral)
FB 253-268 (bearish)
TSLA 656-828 (bearish)
Bitcoin 43,990-55,419 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
