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    The Call @ Hedgeye Plus

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Suffice to say, after the SP500 has been hammered for a 100 point, -11% move, since we we’re calling it as overbought last week, the math in my macro model has changed!

Last week I said the VIX could have a +27% squeeze to the upside and nothing will have changed its fundamentally negative intermediate “Trend.” This is not October/November 2008; if you are managing risk around those same levels of risk/volatility assumptions, I think you’re going to miss the next move. The VIX is +18% today, and it is waking people up because it should… too many people are long the same catalyst – Obama’s inauguration. As a result, the big move in volatility (off the bottom) is now a historical event. Unless I see the VIX close > 54.65, I think it continues to make lower 3-mth cycle highs on rallies. The SP500 can then be traded on the long side from its newly developing range of support.

The next move is to respect the math associated with that new range - I have outlined it below: SP500 836-889 – that’s a 6% range; its going to be very tradable with pending PPI and CPI reports here in the US on Thursday/Friday, then Obama after the market comes back from the long weekend.

Make no mistake, that breakdown of the SP500 “Trend” line at 889 remains today’s reality. Unless we can close above that line, any rally towards it is to be traded with an immediate term defensive bias. Any freak-out selloff testing 836 is where I first cover shorts (like I just did in NKE and EWU), and then consider buying longs.

Keith R. McCullough
CEO & Chief Investment Officer