POSITION: Covered SPY Short
It’s a big up day for the US Dollar and a big down day for US stocks. This is The Correlation Risk.
The problem now is that Growth Slowing as Reported Inflation Accelerates (emphasis on the word Reported) is going to make the US economy look a lot like The Stagflation. And The Stagflation is bad for the market multiple.
Remember, Reported Inflation is a lagging indicator, whereas the USD/CRB relationship is a leading one. For the stock market, we’ll continue to summarize this as Deflating The Inflation (Q2 Macro Theme)– and as it occurs (May-July), you want to be managing risk to US Equities with a bearish bias. Short high, Cover low.
Across our 3 core risk management durations (TRADE, TREND, and TAIL), here’s where risk is priced today:
- Long-term TAIL = 1377 remains resistance – long-term lower-highs are bearish (Japan)
- Intermediate-term TREND = 1321 is under siege today and needs to hold this week or this market could go a lot lower
- Immediate-term TRADE = 1315 is oversold, setting us up for another low-volume bounce to lower-highs YTD
Ultimately, the only way out of this mess (for the economy and country) is via a strong US Dollar. That’s why Deflating The Inflation is going to be a bullish catalyst for stocks. From what time and price remains a question that we’ll be answering day to day.
Keith R. McCullough
Chief Executive Officer