Macro Mixer: VIX, Sovereign Debt, and The SP500

Volatility continues to be bombed out.  Yesterday, the VIX declined 4.4% and is down another 2% today.  Our refreshed immediate term oversold line for the VIX is 16.89, with it currently trading at 16.67.  This put the down move in the VIX in the 2.5 standard deviation zone, which our models show as typically a good entry point almost 90% of the time. 


Or, said another way, we are over bought on the S&P 500. 


We are currently long the VXX, which we understand is not a perfect way to play being long the VIX.  A more effective way to play long the VIX would be through options if you can do it - 18.64 is resistance on the VIX. 


The VIX is screaming complacency and right now the S&P is down slightly as the US MACRO data points today are mixed to say the least:


(1)    The CPI reading is inflationary


(2)    Modestly higher-than-expected jobless claims.  First-time jobless applications dropped by 5,000 to 457,000 in the week ended March 13.  The number of people receiving unemployment insurance increased, and those getting extended benefits also rose


(3)    A slight improvement in Philly Fed survey exceeded expectations


(4)    There is continued uncertainty regarding the resolution, or lack thereof, or Greece’s sovereign debt problem


We are currently short the SPY after seeing 11 straight days of have 9 of 9 sectors positive on TRADE, as measured by the Hedgeye Risk Management models.  It’s only the second day in a row where the models have 9 of 9 sectors positive TREND.  The models are showing perfect, but perfect is not perpetual.  We are managing risk accordingly.   


Greece is trading down over 3% today, bringing the year-to-date decline to -8%.  The issue of sovereign debt is not resolved and is unlikely to be resolved any time soon. 


We will be addressing the sovereign debt issue on a conference call with clients tomorrow at 11am.  The flowing chart is from Reinhart and Rogoff’s book This Time is Different, a Hedgeye-recommended account of 8 centuries of financial imprudence.  The chart clearly shows that sovereign debt defaults are more normal than investors realize.


Howard Penney

Managing Director


Macro Mixer: VIX, Sovereign Debt, and The SP500 - hp111


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