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Position: Short the S&P 500 via the etf SPY; Long Volatility via the etf VXX.

Tops are processes, not points….  This is how we see the risk management setup for the S&P 500 in 2Q10.

As we move through the balance of April and head into May, we expect stocks to lock in intermediate term highs as bonds break down to lower-highs.  As such, we will be managing risk around the potential for bonds to break down more severely and for the S&P 500 to correct by about 7% in the back half of 2Q10.

Currently, the S&P 500 is in a bullish formation.  A bullish formation occurs when the TRADE, TREND, and TAIL lines of support for a security's price sit below the current price and the longest term duration underpins our intermediate and immediate term durations of price momentum.

Right now we think the best idea is to be long high grade bonds and equities and short high yield!

We have a very healthy degree of skepticism of Government, Politicians and the market’s current levels and we are managing risk accordingly.  As we think about the setup for the S&P 500 over the next three months we observe all the following as headwinds for the market: 

  • Market Sentiment:
    • Volatility is broken on all three durations – TRADE, TREND, and TAIL
    • Institutional Investor survey (weekly) shows one of the widest spreads between “bulls” and “bears” since 2007
    • By early May the “easy compare” of 1Q10 earnings season will be in the rear view  
  • The Economy:
    • Headline CPI accelerated sequentially (month over month) from +2.1% last month to +2.3%
    • The balance sheet of the US is no different than the other P.I.I.G.S.
    • Sovereign debt issues are here to stay
  •  Interest Rates:
    • The April Fed meeting…. “extended and exceptional” is unsustainable and unreasonable; should be removed
    • The high yield market is at levels not seen since 2007; junk and muni issuance are making new highs
    • Treasury yields are scaring the horses out of the barn; the big rate moves (UP) across US history start in the spring and end in the fall
  • Commodities:
    • Oil prices are at levels not seen since Q408 (bullish TREND) and inflationary
    • Copper prices continue to be in a Bullish Formation (bullish TRADE, TREND, and TAIL).
    • Gold has very recently signaled being back to a bullish intermediate term TREND; is the Fed debasing the Dollar again?
  • The Consumer:
    • Consumer and Business confidence is stuck at very low levels
    • Job creation is anemic
    • Mortgage rates are headed higher - mortgage applications were down last week led by a sixth-straight decline in refinancing

Howard Penney
Managing Director