POSITION: no position in SPY
The bad kind of risk management uses a 1-factor price momentum model with a fixed duration. The good kind of risk management uses multi-factor and multi-duration models. Chasing trends and/or price momentum tends to end badly if you aren’t liquid and/or hedged.
This, of course, will make absolutely no sense to people when buying all dips within a bullish upward channel of price momentum is working. This is typically when the storytelling gets really good. “The market is cheap on historical valuations” … “US growth is back” … etc…
Now to illustrate the problem with this one-factor/one duration strategy, all you have to do is pull back the curtain to a longer-term TAIL of price data. In the chart below we show the SP500 on a 4-year basis. On this score, not surprisingly for those of us who still remember the storytelling associated with the heights of 2007-2008, the SP500 is simply making another lower-high.
As of yesterday’s new closing high for this intermediate-term cycle at 1332:
- The SP500 down -14.9% from its October 2007 closing high
- The SP500 is up +97.0% from its March 2009 closing low
Now, since I tend to be lopped in with the perma-bears anytime I say anything that isn’t perma-bullish US Equities, as a reminder this is what I wrote on March 4th, 2009:
"Early Look: Obama’s Bottom?": The SP500 was down another -0.64% yesterday so I added to my exposure to US Equities, taking my Asset Allocation Model up to 22% in the USA versus the 9% I had allocated in the US as of Monday morning. Immediate term bottoms are processes, not points... so when prices are lower than my entry point, I buy more. Buy low, you know... like the community organizer said!”
And back then I was being called a socialist Obama/FDR lover inasmuch as today I am being called an anti-Obama raging Republican…
Time and price change the storytelling on Wall Street, but the reality is that my risk management process hasn’t changed. I had a 22% allocation to US Equities in the Hedgeye Asset Allocation Model then (my peak for an asset class is 33%) and today I have a 6% allocation.
Then we were making a long-term higher-low. Today we’re making a long-term lower-high.
My immediate term TRADE lines of support and resistance are now 1321 and 1336, respectively. And my draw down line of risk is -7% lower down at 1242 in the SP500.
Keith R. McCullough
Chief Executive Officer