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The Bounce: SP500 Levels, Refreshed

POSITION: no position in SPY

Fortunately I stayed with the risk management process and covered my short position in the SPY on Friday.

I am not surprised that we have seen the SP500 bounce from its immediate-term TRADE line of support at 1276. On Friday we obviously all knew that today would be ripe for month-end markups. After one of the most expedited 22 month rallies in US stock market history, I don’t expect the bulls to give up readily. Intermediate-term tops are processes, not points.

Friday’s move to cover doesn’t imply that I’m not bearish on US Equities anymore. It simply implies that I am waiting for a higher price to re-short them, selectively (we already re-shorted TGT this morning on strength). Friday’s moves in both volatility (VIX) and the SP500 were critical in that they arrested this almost surreal level of recent upward price momentum in US stocks.

Looking forward, here are a few important lines that I’m watching: 

  1. SP500 TRADE line resistance is now 1288
  2. VIX TREND line support is now 18.71 

If the VIX breaks down through that TREND line, I have no doubt the bulls will try to push the SP500 back toward its closing cycle-high of 1299. That said, 1299 is simply another lower-long-term closing high (think Nikkei 225 for 15 years) and when I think about this market’s long term TAIL, that’s bearish.

If the SP500 were to breakdown and close below 1276, that would be bearish too (TREND line support = 1224). In our S&P Sector model, we’ve already registered 5 of 9 Sectors breaking their immediate-term TRADE lines, respectively (XLY, XLP, XLV, XLB, and XLF). This is a bearish leading indicator.

If you covered some of your shorts on Friday, congrats. Don’t get sucked in on the long side today – this is going to be a volatile week.

KM

Keith R. McCullough
Chief Executive Officer

The Bounce: SP500 Levels, Refreshed - 1