Todd Harrison: Russia, Twitter, Cannabis, and the Approaching Volatility Storm
Weighing the world one dynamic at a time.
It's Turnaround Tuesday, which can only mean one thing for a tape that's been slithering sideways for the past two months: Volatility is coming.
While there's little indication it arrives today, it's a matter of time before the world gets wilder. Per the chart below, which we shared yesterday (thank you, Michael Sedacca), currency volatility, interest rate volatility, and S&P 500 (INDEXSP:.INX) volatility are compressed across the board.
That makes sense in a world where liquidity is artificially infused into the financial fabric -- volatility is the opposite of liquidity -- but not so much as the punch bowl is being taken away.
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To be sure, the price action in the stock market has been the definition of resilient; despite a bear market in high-beta tech, the S&P remains a kitten's whisker away from an all-time high. The bulls will argue that as high-beta tech bounces (as it did yesterday), the coast will be clear to the upside. As the old saw goes, "The longer the base, the faster the chase," meaning once the sideways price action in a stock or index resolves, the move is typically swift.
As always, it's not that simple. While the S&P is the definition of range-bound, the financials and small caps remain in a pattern of "lower highs," which is a classic sign of distribution.
And there's the matter of the Bloomberg SMART money index, which we've been tracking the last few weeks and updated below. Unless we see a sustained shift in behavior -- more presses lower in the first 30 minutes, followed by end-of-day ramps -- this is a pretty massive red flag. Juxtapose that against the depressed levels of volatility and you have a one-two punch that's waiting to exhale lower.
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- The banks underperformed yesterday, led by JPMorgan (NYSE:JPM) and Goldman Sachs (NYSE:GS). As go the piggies, so goes the poke; check it.
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Ukraine continues to deteriorate, unfortunately, while investors are quick to assign a "Cyprus" or "Greece" tag to it (read: Nobody thinks it will "matter"). Russia does matter, in my view, and we would be wise to respect that.
Biotech put in a third "higher low' above the 200-day moving average (IBB 222.50), while the Russell 2000 (INDEXRUSSELL:RUT) is trying to hold its 200-day (RUT 1114). The banks, for their part, are approaching a "triple bottom" at its 200-day (BKX 67). Tell me the next leg for these sectors and I'll tell you the next leg for the tape.
Gold is again jockeying between its 200-day and the 50-day. One would think that geopolitical tensions would jack the yellow metal, but thus far, that trade hasn't played through. Gold, like so many other assets classes, has been relatively muted in terms of price action -- and that, too, promises to change.
We touched on the importance of the $40 level in Twitter (NYSE:TWTR) last week into earnings. About 480 million shares from Twitter insiders become eligible for sale today for the first time since the IPO in November (more than four times the current amount available for trading, according to Bloomberg).
- With the stock down 39% this year, some of Twitter's biggest insiders -- with roughly 205 million shares -- announced yesterday that they plan to hold their shares. That's creating quite the battle at $40, which remains the technical toggle to keep your eye on, per the chart below.
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Walking back from a business lunch yesterday thinking about the tape, the words "suspended reality" came to mind. Ain't that the truth.
One of the reasons GW Pharma (NASDAQ:GWPH) is up 682% since September is that it's the only "real" cannabis play, which is to say that Bank of America (NYSE:BAC) and Morgan Stanley (NYSE:MS) both cover it ($93 and $103 price targets, respectively). Seeing both sides, as more cannabis plays come to market, GW will lose its "monopoly status" in the institutional space. Something to think about.
Yes, cannabis is still my single best idea for the next decade, but the emerging sector is still fraught with risk. As more vehicles become trusted (and covered), ETFs will emerge. That's a ways away -- or, I should say, the ETF I would invest in is a ways away.
- Did you know that each SpongeBob character represents one of the seven deadly sins? Neither did I!
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Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at firstname.lastname@example.org.
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