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POSITION: no position in SPY

With our call for a -5.4% drawdown yesterday being realized, now it’s time to wait and watch. In terms of managing immediate-term TRADE risk in US Equities, the two main factors I’ll be waiting on are as follows: 

  1. SP500 Intermediate-term TREND line = 1273
  2. Volatility (VIX) long-term TAIL line = 22.03 

We made a call on this inverse relationship between the US stock market price and Volatility in April of 2010 (“April Flowers/May Showers”) and we’ve been making it again since mid-February. The correlation risk here is surreal.

With consensus cheering on Big Government Intervention, what they are really getting is Price Volatility. The Keynesians should be

careful what they wish for. Confidence in markets isn’t built through a bullish breakout in the VIX (TREND line = 18.35).

If the SP500 holds below 1273 for the rest of the week, there are plenty of immediate-term TRADE lines of support that you can manage risk around, but the Chaos Theory in our model says that a sustained breakdown below 1273 amplifies the gravitational force toward 1176 – and I’m not so sure too many people are positioned for that…

My immediate-term TRADE lines of support and resistance are now 1253 and 1307. Wait and watch for 1273 break or hold. With inflation being doused by a US Dollar UP day, there are some very early signs to look constructively upon – mind you those are real-time indicators and we still need to get through the lagging inflationary indicators (US PPI and CPI readings) tomorrow and Thursday.

As I wrote in early February (and, not ironically, took some heat for this):

“Almost every other day on our the Hedgeye Macro Morning Call, I say something like this: “If they debauch the dollar, every day and every week, from this day until that, the SP500 could easily get to 1340… and then blow up.”

Just when they thought it was different this time…


Keith R. McCullough
Chief Executive Officer

TREND Break: SP500 Levels, Refreshed - 1