Risk Ranger: SP500 Levels, Refreshed

08/11/11 02:41PM EDT

POSITION: We are short the Financials (XLF)

It’s been a volatile [insert: week/month/year]. Inclusive of today’s pullback, the VIX is up nearly +150% since the start of July.

The Bernank calls this “price stability”.

We call volatility for what it is and we are quick to point out its effect on managing risk – specifically in that it adds an extra layer of complexity for larger institutions. Big Government Intervention does two things: 

  1. Shortens economic cycles
  2. Amplifies market volatility 

We are not sure the Eurocrats over at the European Securities and Markets Authority (the agency responsible for imposing short-selling bans in Europe) understand this simple concept. Furthermore, we aren’t convinced a short-selling ban is the proper remedy to the problems associated with Europe’s banking system (pull up a chart of SocGen CDS).

When volatility blows out like it has in recent weeks, investors would do better to shorten their duration and trade the range(s) appropriately – in this instance, with a bearish bias. We call this Risk Ranger and it remains one of our current Key Macro Themes.

Some call it “trading”. We call it “managing risk”. Tuh-may-toe. Tuh-mah-toe.

The bull market in price IN-stability is having a profound effect on the output of our core three-factor quant model (PRICE/VOLUME/VOLATILITY). Specifically, our immediate-term TRADE ranges are now wide enough to fit my offensive line-sized physique through: 

  1. TREND (bearish) = 1,314
  2. TAIL (bearish) = 1,257
  3. TRADE range = 1,086-1,193 

Note, our current immediate-term downside support target is within crash territory (a peak-to-trough decline of 20% or more). Moreover, the SP500 (along with most things that tick live in the Global Macro universe) remains demonstrably broken from a TREND and TAIL perspective. Manage that risk accordingly.

Darius Dale

Analyst

Risk Ranger: SP500 Levels, Refreshed - SPX

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