Risk Management Time: SP500 Levels, Refreshed...

Once in a while, markets agitate me. There is a very high r-square with those times and when my macro returns aren’t positively correlated with my view. On Tuesday, I was agitated. Today, I am smiling. This is a cyclical business.

 

As we test my immediate term (TRADE) oversold line for the SP500 (1068) here intraday, I am very much respecting that the risk management game here for US Equities has changed. Whether or not I decide to cover my short position in SPY won’t change my intermediate term (TREND) view that the SP500 is broken (1101).

 

In the chart below, I show the long term (TAIL) line that I am currently measuring as support. It’s all the way down at 976. No, that doesn’t mean that I think we are going there today, tomorrow, or next week for that matter. It simply means that I think a test of that line is finally in play.

 

Market prices and the probabilities embedded in those prices are constantly changing. The fractal math in my macro model updates every 90 minutes of marked-to-market trading in an effort to dynamically reflect those probabilities. Some people call this being “short term.” I call it driving with my lights on.

 

Quite often, what consensus considers improbable becomes probable. The art of risk management is not missing those flashing lights as they turn from green to red.

 

It is now probable that we see the SP500 test the 976 line sometime in the next 3 to 12 weeks. That would equate to a -15% peak-to-trough correction from the recent cycle-high of 1150 that was registered on 1/19/2010. I wouldn’t consider that a “crash” scenario; but I would consider it a foreseeable probability that you should be managing risk towards over the intermediate term.

 

I turned the lights on this morning carrying only a 3% position in US Equities in my Asset Allocation Model. Even though that’s really low, I’m not deciding whether or not I should up that right now. I’m simply watching and waiting for an opportunity to cover my SPY short.

 

Take your time. Don’t get agitated.

KM

 

Keith R. McCullough
Chief Executive Officer

 

Risk Management Time: SP500 Levels, Refreshed...  - zeechart

 


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