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POSITION: Short SPY

I feel like I am watching a rewind of the February 2011 top, but scarier. This time, I can’t count how many people are telling me to just buy US Equities because a Crashing Currency doesn’t matter, yet…

Why are stocks up +4% in a straight line since last Monday? I think the answer to that is crystal clear – The Chase into month-end performance reporting is officially on, because The Bernank said it’s on. Nice trade. We had the call on his being Indefinitely Dovish right (long Gold, Oil, and The Inflation), but short SPY wrong.

What are my catalysts and why am I staying short SPY? Gravity, time, and price. 

  1. Gravity = my quantitative risk management model (grounded in chaos theory) that I have used since founding the firm accepts mean reversion as the highest probability risk management strategy to repeat with discipline. That doesn’t mean it always works – it just means it works a lot more than it doesn’t.
  2. Time = the macro calendar of catalysts picks up, big time, in the second week of May when Geithner is going to face a generational debate on the debt ceiling and not being able to finance the debt without legislation. If the US currency crash is going to happen in my lifetime, I’ve said it will be in Q2 of 2011. The Currency Crash may already be in motion – but it won’t end well for anyone if it looks like Q208.
  3. Price = the inverse relationship between the SP500 and the VIX has been one of the highest quality contrarian signals I’ve leaned on since 2008. It’s almost autopilot at this point to sell SPY at 15 VIX. The risk obviously is that Pavlov’s bell stops ringing here – but it hasn’t yet. 

If the SP500 can grab 1367 before it corrects, that will be a 3.3 standard deviation move in my risk management model on my immediate-term TRADE duration – doesn’t happen very often, but anything can happen.

KM

Keith R. McCullough
Chief Executive Officer

The Chase: SP500 Levels, Refreshed - 1