POSITION: no position in SPY
I’ve seen bulls and I’ve seen bears. I’ve seen neither survive in perpetuity.
After a 40 point 3-day drop in the SP500 from my “Exhausted” range of 1, I think the “flows” bulls have been reminded of the bearish fundamentals that are associated with Global Growth Slowing as Global Inflation Accelerates.
What was 3 days ago was then, now we have to live in the now. And right now, the SP500 is trying to make up its mind between a -2.6% correction (1308) and a -6.9% drawdown (1251). If the SP500 closes below 1308, we’ll say a -6.9% intermediate-term peak-to-drawdown is a probable risk.
Managing your gross or net exposure is one way to manage drawdown risk. Another is to be dynamically managing your asset allocation to cash. If we’ve all learning anything from managing risk in the early part of 2008, it’s that cash can be cool – particularly if inflation remains stubborn and sticky.
In terms of an immediate-term TRADE oversold line, 1295 is now our number. If we remain below 1308 on a closing basis, there will be plenty more days like this in the coming weeks. Pavlov may very well have taught everyone to buy every dip – but that doesn’t mean everyone is still going to be a winner.
Volatility (VIX) backing off today is both bullish and bearish all at once. Anytime we see the combination of a bullish TRADE and TREND breakout in any market price, it begs the question as to where that bullish breakout stops making higher-immediate-term highs.
Currently, what was heavy overhead TREND line resistance for the VIX is now support at 18.11 and I see no immediate-term TRADE resistance to north of 23.
If the SP500 can close above 1308, a lower-high of immediate-term TRADE resistance at 1330 is still our line.
Keith R. McCullough
Chief Executive Officer