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POSITION: no position in SPY

For the sake of risk managers out there who still respect that mean reversion is one of the most powerful mathematical forces to consider in risk management, I think I may have to preface every note I write on the SP500 from this price and beyond with the fact that this has been the most expedited 24-month move (in price) in modern US stock market history (rivaled only by the 1936 rally, which obviously ended in tears with another Big Government Intervention strategy in 1938).

That said, that doesn’t mean markets can’t melt-up before they melt-down. And this one is melting-up, right here and right now – so our job is to deal with it. Let’s do that the way we always do, across our 3 core durations: 

  1. TRADE (immediate term) – bullish on a 2.5 standard deviation move to 1330 (the +3 standard deviation move I have been talking about is 1340);
  2. TREND (intermediate term) – assuming we get the 1330 print, I have -7.3% downside risk to my TREND line of 1233; that’s your mean reversion risk (next 3-6 months); and
  3. TAIL (long term) – don’t forget that all we are doing here (like they did in Japan) is using government leverage to inflate to another lower-long-term high. 

Now 1330 is -15% below the October 2007 all-time high, but +97% above its March 2009 low (that’s not a typo). So the question really comes back to the incremental buyers who are going to fly with Buzz Lightyear to 1340 and beyond: What’s are you playing for from that price – and, more importantly, what’s the intermediate-term mean reversion risk to that strategy?

For now, we’re leaning long in the Hedgeye Portfolio and I’m very worried about it. From here, I expect to take down exposure on the way up.


Keith R. McCullough
Chief Executive Officer

The Melt-Up: SP500 Levels, Refreshed - 1