The Correlation Risk: SP500 Levels, Refreshed

POSITION: Short SPY

 

If they didn’t know there was a surreal amount of The Correlation Risk associated with The Bernank’s Burning Buck, now they know…

 

Whether it’s Euros, Gold, Oil, or the SPYs, it’s one giant correlation suck. With the US Currency Crash finally stopping, abruptly, for a day, you can now see the crashing expectations of everything that’s priced relative to those crashing Dollars (remember Q208).

 

The good news here for US stocks is that the SP500’s inverse correlation to the USD is lower than that of say the Euro and Silver (-0.95 and -0.99, respectively on our intermediate-term TREND duration). The bad news is that it’s still very high at -0.82.

 

The rotational mechanism within the SP500 is healthy to observe. US Dollar UP = Deflating The Inflation (our Q2 Macro Theme), and that’s bad for the big beta TRADE (oil, basic materials, financials), but really good for the rest of America trade (consumers, savers, transports).

 

As a result, I’m still mapping a correction in the SP500 of -2.7-4.3% from the April month end high. No, that’s not calling for a crash – although beta can indeed feel that way.

 

Putting some prose with a picture (see chart below), here are some risk management lines to consider: 

  1. Immediate-term TRADE support of 1352 is now immediate-term TRADE resistance.
  2. Immediate-term TRADE support drops to 1332 (making the new immediate-term range = 1)
  3. Intermediate-term TREND support remains 1310 

Out on the long-term TAIL, as long as the manic media is still debating trivial levels like “Dow 13,000”, as professional Risk Managers you should be quite happy to know that using that consensus as your backboard will simply help you manage your gross and net exposures proactively ahead of their predictable behavior.

 

On the way down today (the SP500 is down every day this week), I’m expanding both my gross and net through the two Hedgeye products that I can best express that in (the Hedgeye Asset Allocation Model and the Hedgeye Portfolio).

 

Right now I have 16 LONGS and 7 SHORTS (versus Monday where I tightened up my net exposure to 15 LONGS and 12 shorts). I think I’m too long.

KM

 

Keith R. McCullough
Chief Executive Officer

 

The Correlation Risk: SP500 Levels, Refreshed - 1


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