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Chart Of The Week: Shark Bite!

This weekly overlay of the VIX and the SP500 says pretty much all that needs to be said. The shorts we’re eaten by what we call the “Shark Line” this week.

January 2nd of 2009 will likely mark an immediate term capitulation of this correlation, much like that of November 20th, 2008. On November of 2008, the VIX peaked +52% higher than Friday’s close at 80.86. On that same day, the SP500 bottomed -24% lower at 752.

My immediate term overbought/oversold macro levels for the SP500 and VIX, respectively are now at $925.88 and 38.87. Don’t get suckered in at immediate term “Trade” bottoms or tops. That’s not going to make you a winner in The New Reality of 2009.

Keith R. McCullough
CEO / Chief Investment Officer

Quote Of The Week: "Re-Flating" The Bulls

"As America focuses on bailing out everyone who is on the brink of failure, thank God we have places where failure is still an option in order for innovation to be realized. When you strip away a country's or individual's right to fail, you take away their ability to succeed. Let the natural forces of accountability work for all.”
-Stuart Witt (General Manager of the Mojave Air and Space Port)
For those of us moving upward and onward in The New Reality, this week was a fantastic one. We spent time with our families, rang in a New Year, and made some serious weekly returns!

This week was all about “Re-flation.” In sharp contrast to 1970’s style inflation, all we did was “re-flate” the asset inflation balloons that have already popped. After the worst stock market deflation since 1931, the SP500 raced higher for another +6.8% weekly gain, taking its cumulative “re-flation” from the freak-out “de-leveraging” November 08’ lows to a whopping +24%.

Not to be outdone were them sneaky little hard assets formerly known by the “Investment Banking Inc.” leverage traders as Commodities. The CRB Commodities Index tacked on a “re-flation” dance of her own for New Year’s, adding +8.4% on the week. Crude oil busted out with a +23% “go to move” for all the snooze you lose bad news bears to end their year on.

Bonds, of course, got hammered - like they should in an environment when there is no incremental buyer for a ZERO return. That’s reason number 1, 2, and 3 as to why we have had a ZERO allocation to Bonds in our Asset Allocation model since October of 2008.

Stuart Witt is a man who look is looking forward, and his quote this week couldn’t be more appropriate within the context of how an American Capitalist should be thinking about risk. On the insert of Barron’s this weekend, there is a full page color ad from the CBOE on a “Risk Management” conference. After cutting global equity and commodity prices by almost 2/3d’s in the aggregate in less than a year, don’t you think these bearish bulls are a little late to the proactive risk management party?!

Failure, in any capitalistic system, should always be an option…. But you shouldn’t fear it most when the whole wide world is screaming bloody murder. The bears continue to signal the coming of the apocalypse while the bulls remain bearish. This consensus will continue to resolve itself in a Darwinian way – this is America - “let the natural forces of accountability work for all.”

Keith R. McCullough
CEO / Chief Investment Officer

US Market Performance: Week Ended 1/2/09...

Index Performance:

Week Ended 1/2/09:
DJ +6.1%, SP500 +6.8%, Nasdaq +6.7%, Russell2000 +6.1%

2009 Year To Date:
DJ +2.9%, SP +3.2%, Nasdaq +3.5%, Russell2000 +1.3%

Keith R. McCullough
CEO / Chief Investment Officer

Hedgeye Statistics

The total percentage of successful long and short trading signals since the inception of Real-Time Alerts in August of 2008.

  • LONG SIGNALS 80.37%
  • SHORT SIGNALS 78.32%

Eye On The UK Housing Market: Bad to Toxic...

BOE stimulus has not yet reached consumers…

Gordon Brown says that he is “angry” at lenders - this is understandable. In the wake of a $75 billion bank bailout and successive rate cuts the latest data shows that UK banks are not passing through liquidity into the consumer market.

In sharp contrast to the USA, where we are seeing a refi recovery, mortgage approval statistics released today showed the lowest acceptance levels in almost a decade while the BOE’s measure of lending indicated that consumer credit has failed to expand as hoped after government recapitalizations. With average mortgage rates falling by less than half that of BOE cuts and lender surveys confirming a refusal by many banks to extend further credit, there appears no relief in sight for the UK housing market. HBOS numbers released today show a year-over-year decline of 18.9% in December, yet British homeowners feel no closer to a bottom.

We are short the UK via the EWU etf, which underperformed miserably today relative to US Equities. We continue to believe that the economy there is lacking any clear near term catalysts for renewed growth no matter how low rates go. There is no “Obamerica” for Britain.

Andrew Barber

If the market closes right here...

Best first day for the SP500 since 1988... remember 1987?

VIX Oversold, Finally!

I have been waiting for this VIX level, patiently. This is another way to think about making sales on the long/short sides right here and now. As overbought as the SP500 is for an immediate term “Trade” (see my prior SP500 “Making Sales” note) is as oversold as the VIX is under 38.

Down another 6.4% at $37.45, the VIX is hitting its 3 day low as the SP500 hits its 3 day highs. The VIX has effectively crashed -54% from its November 20th peak of $80.86 – yes, that was also the date of the SP500’s capitulation low of 752.

The VIX could easily put on a +27% move from this level and not violate the dotted red line we are showing below in this chart. If that were to occur, stocks aren’t going to be going up at the same time. Manage towards the improbable outcomes as well as the obvious ones – that’s what risk management is all about. It feels really good to be long here, but all good things find a point of exhaustion.

Keith R. McCullough
CEO / Chief Investment Officer

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