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POSITION: Short SPY

Suffice to say, it’s been an interesting week to start off the New Year. Almost every global macro data point that I measure as a very immediate-term leading indicator has all of a sudden flashed an either amber or red flashing light. I said almost.

US small caps, which everyone and their brother was hot and heavy for after a boomer of a 2010, are now down for 2011 YTD. Barely down, but down doesn’t register as a green light in my model.

The SP500, however, isn’t flashing amber or red yet…

For that to occur, I’d need to see the SP500 breakdown and close through the 1265 level outlined in the chart below. That’s the immediate-term TRADE line of support. If it holds, God bless my longs – if it breaks, God help the perma-bulls.

If we’ve learned anything in the last 3 years about markets, it’s that they subscribe to mean reversion. Just when you think all of your short ideas are stupid, they become the only thing that works. A TRADE line breakdown through 1265 puts the intermediate-term TREND line of support down at 1190 back in play.

Now I fully realize that it’s been a while – since we had a mean reversion oriented correction that is… and that’s exactly why the probabilities are climbing of one occurring. This is actually the 1st time that the SP500 will close down on back to back days since November 29th-30th …

It’s been a while, indeed.

I’m having surgery on Monday. So I’ll be out for a few days with no SP500 levels updates. Don’t pray for me – its minor stuff. But while I’m gone, keep the 1265 line in mind. If it cracks, the buy-and-hope-bulls who re-appeared after a +89% rally from the March 2009 lows, may need the prayers.

Cheers and enjoy your weekend,

KM

Keith R. McCullough
Chief Executive Officer

The 6% Risk: SP500 Levels, Refreshed - 1