POSITION: Short SPY
I’ve decided to come out of retirement. Short selling is too much fun.
The risk management setup here is getting as interesting as it was on Valentine’s day. We’ve effectively seen a -6.5% correction all but recovered on low-volume, slowed fund-flows, and an almost complete collapse in volatility.
Top-down, our view remains that market expectations that hang in the balance of what a few humbled men in the Keynesian Kingdom do next are going to perpetuate Price Volatility. We can’t get upset about that – we just need to deal with it – and one of the most obvious ways to capitalize on that is to manage risk around the inverse correlation between the SP500 and the VIX.
- SP500: Pre-open this morning my immediate-term upside TRADE target in the SP500 was 1334. Now it’s 1341. Interestingly, but not ironically, that’s right back to the range I outlined as 3 standard deviations overbought using my intermediate-term TREND duration back in February (1).
- Volatility (VIX): we’ve seen a -43% draw-down in the VIX in 12 trading days. A) that’s the biggest move down over that duration ever and B) ever is a very long time. I don’t expect this up USD, down VIX, UP stocks thing to continue for the next 3 weeks.
The VIX has a ton of immediate-term TRADE support between 16.36 and it’s long term TAIL level of support at 15.29. So the highest probability risk management decision I can make from here is to sit tight and Wait & Watch for that volatility zone to be realized on the downside as 1 is tested on the upside. We’re inching closer to these key zones today.
Inasmuch as it was a great call to cover most of our short positions at SP/VIX 29.40, it’s been a bad call coming back to the short side too early. I think I’ve thought about the setup better than I’ve executed on it – and, again, that doesn’t make my being short the SPY here right – but it does provide a healthy reminder that the discipline of patience is what will really drive performance in Q2 of 2011. The next few months will not be for the faint of heart.
Cover low, short high – and stay transparent, my friends.
Keith R. McCullough
Chief Executive Officer