“Certainly some of the most elegant and robust constructions so far are to be found in this chapter.”
- Jim Gatheral
Over the years I have had plenty of questions from sharp institutional investors about how I built my Risk Range & TRADE/TREND/TAIL risk management #process. To this day, the #1 thing people ask for are Risk Ranges on everything.
I won’t giveaway my calcs or codes, but I do point people to required readings on what made me think about building things that use what Mandebrot (and Hurst who named it) discussed as rescaled range analysis.
The aforementioned quote tipped me off a long time ago (Gatheral wrote The Volatility Surface in 2006 with a foreword from Taleb) but it still matters today:
“In this final chapter, we will investigate the pricing and hedging of claims that have realized volatility or variance (quadratic variation) as underlying.” (pg 133)
What’s underlying your market timing and sizing #process?
Back to the Global Macro Grind…
I certainly hope the answer to that question isn’t a 50-day, single factor (with no realized/implied vol inputs), Moving Monkey. If you think their pain in Bitcoin is #on now, just wait until those monkey bars at the Macro Tourist zoo break!
While I do enjoy poking fun at people who still think that the earth (and valuation) is at the center of the risk management universe, outright mocking simple moving averages is done in the spirit of having people question THEIR prior process.
If you don’t want your Old Wall premises challenged, you’re going to lose to those who embrace the opportunity to evolve.
There are plenty of chart monkeys out there in macro who have quite literally zero Macro Awareness on where The Quads were (they are reported economic reality that build base effects based on empirical facts), never mind where they’re going.
Then there are those of you who are Macro Aware who understand that The Singularity of The Signaling #process is almost always front-running economic Phase Transitions in The Quads.
So, other than the @Hedgeye TREND Signal break-down in Bitcoin (which happened last week) when BTC broke $49,006 on a realized Vol of Vol breakout towards the 85th percentile of readings on a 3-month TREND, what else is Bearish TREND this AM?
A) Japan’s Nikkei down another -1.3% to -5.5% in the last month
B) Nothing in European Equities (buy the damn dips in EWG, EWL, RSX, etc.)
C) Gold
But, but… “my Gold, just got back above the 200-day”…
Clearly, at least on my Twitter stream, I’ve been triggering Gold Bugs for the last week. That’s what happens A) when Gold finally has a relative and absolute week of positive returns and B) it gets above its 200-day Moving Monkey, I guess.
Since Gold signaled Bearish @Hedgeye TREND entering #Quad2, do you know it spent a LOT of time above the 200-day? Did that prevent Gold Bugs from having a -18% drawdown from Gold’s Cycle peak?
Let’s keep it real here, with both nominal and real yields back on the rise this AM (UST 10yr Yield +3bps to 1.66%), Gold is still in the midst of a -11.3% #FullCycle Investing Drawdown from its #Quad3 Cycle Peak in AUG of 2020.
In other consensus news, some people are calling for the EOW (end of world) again this AM because:
A) SPY just corrected 2-days after an epic 2-day ramp to -2.5% from its all-time high
B) The 4 Horsemen actually had a down day (from their Cycle Highs)… and
C) Elon The Storyteller is… well… still telling stories
Does a US stock market correction day on Down Volume (total US Equity Volume, including dark pool, was down -6% vs. its 1-month average yesterday) equate to a broad-based #Quad2 breakdown? A: absolutely not.
What’s really happening this morning is what’s been typical of #Quad2 in Q2, i.e. a 2-3 day correction that has:
A) Dollar UP from the low-end of its Risk Range … and
B) Rates UP, at the same time
You don’t have to boil the ocean on why that 2-factor cocktail creates rockier risk management seas:
A) Dollar UP = Commodities & 3 Horsies (Energy (XLE), Materials (XLB), and Industrials, XLI) DOWN
B) Rates UP = Rate Sensitive Sector Styles and now QQQ and Tech (XLK) DOWN
That last part doesn’t actually back-test as a major risk factor IF YOU GET the #FullQuad2 Cycle right. If you bought Tech (XLK) when #Quad2 started in NOV, you’re still up +21% from there.
Regardless, Tech (XLK) is currently signaling Bearish @Hedgeye TREND alongside widely owned COVID winners (with tough base effect comps!) like AMZN, NFLX… and yes, Bitcoin!
So what do you do with all of that? Don’t overthink it. If you’re mathematically (instead of emotionally) and robustly defining what are Bullish/Bearish @Hedgeye TREND signals, you won’t get everything right, but you’ll sure beat the tourists at the zoo.
Immediate-term @Hedgeye Risk Range with TREND signal in brackets:
UST 10yr Yield 1.58-1.72% (bullish)
SPX 4060-4256 (bullish)
RUT 2139-2281 (bullish)
NASDAQ 12,952-13,566 (bearish)
Tech (XLK) 130.57-138.01 (bearish)
Energy (XLE) 51.44-55.08 (bullish)
Financials (XLF) 36.61-38.47 (bullish)
Utilities (XLU) 63.98-66.90 (bearish)
Nikkei 27106-28877 (bearish)
VIX 14.60-26.93 (bearish)
USD 89.60-90.99 (bearish)
Oil (WTI) 63.80-66.70 (bullish)
Gold 1 (bearish)
AAPL 121-129 (bearish)
AMZN 3115-3329 (bearish)
NFLX 476-503 (bearish)
Bitcoin 39,093-49,295 (bearish)
Best of luck out there today,
KM
Keith R. McCullough
Chief Executive Officer
