Drawdown Risk: SP500 Levels, Refreshed

POSITION: Short SPY

While it’s difficult to quantify how many people agree with our outside-of-consensus view of US Growth Slowing, we are certain that the percentage of people coming into our camp is rising.

Time and price tend to do that, particularly when the most immediate-term data points start to positively correlate with the most immediate-term price reaction.

DATA: This morning’s US Industrial Production print coming in FLAT (0.0%) sequentially for April (versus May) has the Industrial stocks getting slammed (XLI = -1.6% on the day as of 1PM EST), and people asking themselves if the “earnings” of cyclicals are indeed cyclical.

PRICE: Across our core 3 investment durations (TRADE, TREND, and TAIL), this is what Mr. Macro Market is telling me today: 

  1. The long-term TAIL of resistance = 1377 remains intact (lower-long-term highs in the SP500 are no different than the Nikkei’s).
  2. The intermediate-term TREND line of support = 1319 is finally under siege.
  3. The immediate-term TRADE line of resistance (was support) = 1340 has people worried – and rightly so – May is a mess. 

Provided that 1319 can hold for a few days, we’ll call this Drawdown Risk for what it has been – a -3.2% correction. If 1319 doesn’t hold,  I think 1207 for the SP500 sometime this summer comes into play.

That would be a very different scenario than the sellside consensus view about US Growth and SP500 returns for 2011 - and that’s precisely why you should start thinking about it.

Remember, Big Government Intervention A) shortens economic cycles and B) amplifies market volatility.

KM

Keith R. McCullough
Chief Executive Officer

Drawdown Risk: SP500 Levels, Refreshed - 1