“I tend to stay with the panic. I embrace the panic.”
- Larry David
There were very few Institutional Client calls that I was on yesterday where I felt like I was curbing their enthusiasm (to buy stocks). So I figured I’d roll with a little Larry laughter this morning instead of my stochastic instantaneous Vol of Vol Signals.
What percentage of people in markets (there are a lot more people in The Game than ever before) even know where Volatility for the Russell 2000 was yesterday, never mind where it’s trending?
I don’t know… and when I’m registering buy signals like that, I have no time to care. If I’m wrong, I’ll be wrong on my own terms. Panicking alongside a bunch of American PMs that do this, monthly, at this point is not what I do.
Back to the Global Macro Grind…
What’s up with the 1-3 days of panic selling that we’ve now had 1x per month, for the last 4 months of #Quad2? There are multiple parts to answering that question but, #behaviorally, some of the big ones are quite simple to understand:
- Consensus positioning (net SHORT Equity Index Futures/Options) has been BEARISH ALL YEAR LONG
- Every time we get a correction in a Sector, Style, of Factor Exposure, consensus thinks “this is it” (“bubble top”)
- Massive Leverage in hedge fund books trying to run “neutral” where Factors go non-linear on them, episodically
- Episodic-and-non-TRENDING ramps in Volatility, that are BREAKING DOWN ON A TRENDING basis
- Performance problems vs. benchmark returns has forced PMs to chase high and panic sell lower
Unlike something like Lumber, Housing, or US Inventory in the aggregate (where SUPPLY is at Cycle Lows), we have an epic oversupply of both uninformed volume (people new to “investing”) and informed, but “rules-based”, fund managers.
When I started in the hedge fund industry going on 22 years ago, you didn’t have “rules” governing your “net exposure.”
In 2003, my carveout hedge fund book was up +81% gross, and I seriously couldn’t tell you what my net exposure was, ever. How else do you think someone with less than 5 years experience could make that kind of money unless he had no rules?
Then, of course, there was Amaranth, where another Canadian dude had a dissimilar experience with net long leverage.
But my history isn’t the point. The evolution of the hedge fund business is. It drives The Machine. We’ve effectively neutered most rookie and veteran PMs from swinging it around like I and many other hedgies used to.
But that doesn’t mean that I can’t do that now, within the privacy of my own “family office”, eh!
The fact of the matter is I did swing BIG net Long yesterday (73% net long to be precise). Although Real-Time Alerts is NOT a portfolio (it’s a signaling tool that helps you fade your fear and greed), I swung it to 20 LONGS vs. 2 SHORTS yesterday.
Because many aren’t allowed to do that doesn’t mean you or I can’t.
And that’s the other part of my “evolution” of The Game point I am trying to make. How on my fractal God’s good earth are you supposed to run money being “neutral”, but at the same time chasing monthly returns… when… wait on it:
There are 3-6 days per month to both Sell HIGH (tightening your net exposure) and Buy LOW (widening it)?
Now that I’ve challenged the marketing material of establishment thought on “risk management”, allow me to get on with the “why” I did what I did yesterday. Let’s look at what many haven’t a clue on, #RussVol:
A) Like #NazVol (NASDAQ Volatility), there is #RussVol, #BTCVol, #NFLXVol – it’s the Realized Volatility of the thing
B) Like #NazVol, #RussVol (RVX) simply just bounced off its recent Cycle Low (23) towards 28…
C) So, in 2-trading days, the Russell 2000 has a -300 basis point drawdown to -7.2% from its recent Cycle High…
D) And, when certain Hedge Fund pods, lose more than 3% of their capital, they get the Old Tap On The Shoulder
E) Once you’re getting tapped, you’re selling more, lower… and faster …
F) If you get tapped out (fired), the mother ship sells ALL, really fast
So, let’s consider that behavioral reality of The Game within the context of my 3 Buckets of Volatility for #RussVol:
- The Bull’s Bucket 12-22 (where a monkey can make money on the long side buying and HODLing)
- The Chop Bucket 23-34 (where professional faders and risk managers alike get paid)
- The People Get Fired Bucket > 35 (where Levered Long Perma Bulls die)
These @Hedgeye Buckets (or Regimes) of Volatility are a little different than the VIX Buckets, because both historical (realized) volatility and betas are higher obviously for IWM vs. SPY.
Since I have back-tested and, more importantly, traded almost everything in Macro that ticks using my Vol of Vol Signals, you can rest assured that I do not panic-sell when Volatility is bouncing in a bucket within that Vol Bucket’s Risk Range.
Wherever front-month vol closes that day (RVX went out at 28.23 last night), I reset my model AFTER I get my nightly options data (from Bloomberg) where I get insight from implied vs. realized volatility.
This morning’s Risk Range for #RussVol = 21.50-30.04.
In other words, it’s now probable that #RussVol A) flushed out weak hands, like it usually does, in the Chop Bucket and B) is going to take a dip not only at a new Cycle Low, but in the Bull’s Bucket for the 1st time in 2021.
If/when that 21.50 #RussVol prints in #Quad2, please have your local PM who just puked at the low-end of my Risk Range CTRL+Print out what their decisions were on April 20th. Everyone should be held transparently accountable to their process.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.54-1.74% (bullish)
SPX 4081-4199 (bullish)
RUT 2174-2288 (bullish)
NASDAQ 13,634-14,097 (bullish)
Tech (XLK) 138.78-144.01 (bullish)
Energy (XLE) 47.01-50.40 (bullish)
Financials (XLF) 34.52-35.76 (bullish)
DAX 15040-15462 (bullish)
VIX 15.58-19.20 (bearish)
USD 90.76-91.89 (bearish)
Oil (WTI) 60.29-65.26 (bullish)
Gold 1 (bearish)
Copper 4.05-4.34 (bullish)
Bitcoin 53,782-65,596 (bullish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
