Welcome To #Quad2 in Q2

“If we were to study the dynamics of the volatility skew, we would be able to differ between models.”
- Jim Gatheral

No worries, I know you’re headed into your long weekend … I’m not going to go deep on you on Vol of Vol. I’ll just reiterate that amidst plenty of Portfolio Manager panic in March, it’s still #Quad2 in Q2 for the entire G-20, ex-China.

Back to the Global Macro Grind…

Simplifying the complex is my job. So is measuring and mapping the dynamics of Volatility’s Surface. Unless you have your own models for this, it’s neither easy to do nor to understand. The Question, ultimately, is does it work?

Of course it works (or I wouldn’t use it). If Simple Moving Monkeys on static durations had predictive power beyond the behavioral observations of crowds of Macro Tourists at the zoo, I’d use those too!

As Gatheral taught me back in 2008 in The Volatility Surface, it’s particularly important to “observe volatility instantaneously while considering the overall level of volatility” (pg 101).

It’s the particular move in markets that matters, not the “average” of moves, or the “valuations” of things.

Mandelbrot observed precisely that point about the particular things happening at particular times. Those moments are more critical in markets today than they’ve ever been. Why? There’s never been more leverage in the system.

The Machine perpetuates the particular.

Now, since you are Macro Aware, you don’t have to deal with being chirped by me on this over the weekend. Imagine using A) a non-volatility-centric Signal and B) being completely unaware of either The Quad or The Cycle?

It’s no wonder why those tourists need to jump from headline to headline seeking qualitative narratives.

Moving along (and away from simple moving averages!), this morning’s OODA (observe, orient, decide, and act) Loop observations in Global Macro are no different than the ones I’ve been calling out all week.

You should have been buying both GROWTH and VALUE when they were for sale at the low-end of my Risk Ranges in March.

Away from it being #Quad2 in Q2 with my Vol of Vol Signals supporting those damn dip buying decisions, do you need to know why? Not really (if you trust my process). But here’s a list of particular observations that won’t win a Pulitzer as a short-story:

1. #NazVol (NASDAQ Volatility) continued to signal lower-Cycle-lows yesterday = Bullish QQQ
2. KOSPI Vol continued to breakdown overnight, with the Equity Index +0.9% to +2.5% in the last month
3. US Semis (SMH) broke out on my immediate-term @Hedgeye TRADE duration yesterday alongside VXN down
4. Singapore’s Equity market signal continues to signal higher Cycle Highs = +6.9% in the last month
5. Australia’s 10yr Yield ramped another +5bps to +17 basis points in the last month alone, signaling #Quad2
6. Germany’s DAX continues to signal a Bullish Breakout to new Cycle Highs this morning = +7.7% in the last month
7. FTSE, RTSI (Russia), and Norway (NORW) all continue to signal Bullish @Hedgeye TREND with bearish Volatility
8. Oil’s Volatility (OVX) big breakdown Signal (yesterday) is delivering WTI another +1.6% inflation this AM
9. Corn prices had a #Bitcorn moonshot yesterday and are making new Cycle Highs, up another +2.6% this AM
10. Gold remains the dog of Asset Allocation dogs with nothing in my Volatility Signal saying get out on the short side

If you’d like, I can rattle off another 10 or 20 of those one liners embedded in my USA models this morning (because they’re there) or I can fire off moonshot #Quad2 Cycle Charts like:

A) US Consumer Confidence ramping to 109 in MAR vs. 90 in FEB
B) Dallas Fed Service Sector ramping vertically to 28.9 in MAR
C) Chicago PMI ramping vertically to 66.4 in MAR

Institutional Subscribers will get those charts and plenty more in our new Macro Rise & Grind note this morning. So don’t worry, my Macro Research teammates and I have you covered.

No matter what I say or write, executing on the singularity of your process is up to you. Personally, when I get buying opportunities, I’m going to keep doing what I do and give a nice warm welcome to #Quad2 in Q2.

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

UST 10yr Yield 1.60-1.80% (bullish)
UST 2yr Yield 0.13-0.17% (bullish)
SPX 3 (bullish)
RUT 2110-2292 (bullish)
NASDAQ 12,870-13,421 (bullish)
Tech (XLK) 128.40-134.67 (bullish)
Energy (XLE) 47.66-52.34 (bullish)
Financials (XLF) 33.16-34.97 (bullish)
DAX 144 (bullish)
VIX 18.13-21.92 (bearish)
USD 91.56-93.47 (bearish)
Oil (WTI) 57.69-65.02 (bullish)
Gold 1 (bearish)
Bitcoin 53,148-61,609 (bullish)

Best of luck out there today,

KM

Keith R. McCullough
Chief Executive Officer