POSITION: Short SPY
Despite registering some of the most alarming combo volume/volatility studies I have ever registered in my risk management model, the SP500’s mean reversion toward the prior closing highs continues. We’re headed right back to the zone I was highlighting in mid-February and, once again, I think the probabilities of a market crash will start to go up if we get there (1).
I don’t use the word crash very often – primarily because I don’t get the interconnected signals that call for using the word very often. There is a big difference between calling for a correction as opposed to a crash. Over the course of the last 3 years we’ve built a track record in calling for some of both.
The three main factors that are flashing amber lights in my model right here and now are:
- The US Dollar – at a point, correction becomes crash… and a crashing USD (from here) is going to deliver you $120-130 oil.
- Volatility (VIX) – after an unprecedented -43% collapse in less than 3-weeks, the VIX is holding its long-term TAIL of support (15.40)
- Sentiment – today’s Bullish/Bearish II Sentiment survey blew out to an extreme (Bulls minus Bears = 41 points)
The reality of the institutionalization of our business is that a lot of people have to chase performance. The only problem with that is that there is no historical basis for everyone winning with the same strategy in perpetuity. There is a gargantuan amount of correlation risk to the USD being built into commodity and equity markets. The Bernank is holding the bag in creating both expectations of easy money and the net long exposure associated with it.
The math tells me a lot of people effectively are no longer allowed to be bearish (and I mean legitimately bearish, running -20-30% net short). Waiting and watching for my price level to short the SP500 again has been my plan. That level is currently 1 and I don’t plan on being one of the people who says they couldn’t see the next swoon coming.
Keith R. McCullough
Chief Executive Officer