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POSITIONS: Long US Dollar (UUP), Short Industrials (XLI), Energy (XLE), and German Bunds (BUNL)

Keith is out in California meeting with some of our larger west coast based subscribers, but managed to find a few minutes to sneak into Starbucks and short the SP500 in the Virtual Portfolio.   We’ve been waiting and watching on a price, and our risk management models gave us the signal today.  So, regardless of your strategy, we see this as an opportunity to hedge and reduce exposure.

As of 2:15pm today, the SP500 was up 0.63% to 1,372.  Akin to many of the equity market rallies we’ve seen over the past three years, the rally over the last week from the 1,327 level on July 12th was characterized by light volume.   The other important factor in our quantitative models is volatility.

The VIX, a measure of SP500 volatility, is down almost 3% on the day to 16.00. Over the past three years, a VIX level of 15ish has pretty consistently signaled a near term bottom in U.S. equities.  We’ve highlighted this in the chart below.

To Hedge, Or Not To Hedge, That Is the Question: SP500 Levels, Refreshed - VIX


The primary fundamental catalyst over coming weeks is earnings season.  Currently, 73% of the 63 companies that have reported earnings in the SP500 have beat results.  Interestingly, according to analysis from Bloomberg, the entire SP500 is expected to report a -2.1% decline in earnings year-over-year this quarter.  It is difficult to make a case for equities when earnings are not growing.

The other key point related to corporate earnings is that downward revisions are a major headwind, especially into 2013.  Currently, SP500 EPS estimates for Q1 2013 and Q2 2013 are for 14% year-over-year growth in each quarter.  Those numbers are likely going a lot lower.

Daryl G. Jones

Director of Research