Correlation Risk: SP500 Levels, Refreshed

POSITION: Short SPY

There’s obviously a big difference between calling for a correction and a crash – and the best risk management position we can take right now is calling for both!

A crash in the US Currency that is, and a May-June correction in US stocks of -2.3-4.1%.

The USD and the SP500 currently have an inverse correlation of -0.82, so anything that resembles a bid in the US Dollar Index is going to have a big impact on this market’s beta.

Chasing beta? Join the club. If you are performing YTD, you’re definitely long some form of The Inflation (long Oil, US Energy Stocks, Russia, Gold, Silver, etc) – so just know the exposure you own; it’s probably not unique. Thank God I sold Suncor yesterday – now I can buy it back (praying when long correlation risk can be effective). In terms of Energy Stock exposure, we’re long Petrobras and short BP.

Across our 3 core risk management durations (TRADE, TREND and TAIL), here’s what I am currently seeing: 

  1. Long-term TAIL resistance = 1 range (don’t forget that for the long-term, all we are debating here is: "where do we stop making lower-highs?")
  2. Intermediate-term TREND support = 1310 (we V-bottomed in/out of that level when we wrote “Short Covering Opportunity” in mid-March)
  3. Immediate-term TRADE = 1349 support seems to be holding here intraday; a close below it puts 1310 in play (a -4.1% drawdown risk from recent peak) 

What’s fascinating here isn’t The Price Volatility (VIX up +15.2% this week on an SP500 drop of 60 beeps), but the storytelling of the Fiat Fools about “price stability.” Like the “shock & awe” begging of The Bernank (begging for rate cuts to zero in 2008, remember that?), sometimes we should be careful what we beg for…

It’s called Correlation Risk.

KM

Keith R. McCullough
Chief Executive Officer

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