The pain trade in this market will remain up until all overly bearish short sellers are pinned-up at the highs.
Where will those highs be? In the immediate term, my answer is somewhere in the area code of 1161-1163 (see chart below).
What could pin the SP500 up at that line?
- The Fed pandering to the carry trade again in their FOMC statement today (or the expectation that they pander prior to the decision).
- Continued price momentum supported by TRADE and TREND lines of support at 1111 and 1143, respectively.
- Fear of being squeezed.
Fear? Yes, fear can be more powerful than greed. Some pundits have started to say that this market is going up because the mutual fund community is being complacent. I don’t see that in any of our quant models, behavioral surveys, or our daily feedback mechanism (our exclusive network). I do, however, see fear in the short selling community - fear of being squeezed.
Since the Greek freak-out lows of February 8th, the SP500 has had an explosive move to the upside of +9.4%. This came immediately after an -8% drop in the SP500 from January 19th to February 8th. Some hedge funds got whipped around those lines. If you don’t think they fear an SP500 breakout from here, you’ve never really been short a market. Monthly and quarterly performance pressures matter.
My game plan from here is now fairly straightforward. I plan on shorting the SP500 again north of 1161. In anticipation of this potential pinning of the market, I have already proactively cut a lot of losses on the short side. I now have 17 longs and 8 shorts in the Virtual Portfolio versus my long/short ratio being roughly balanced in February.
Keith R. McCullough
Chief Executive Officer