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Bearish Enough? SP500 Risk Management Levels, Refreshed...

Yesterday, I said that if the US stock market were to break down to lower-lows that sentiment would begin to get Bearish Enough. Yesterday’s close of 1050 was a fresh YTD low for 2010, so we’re finally in motion here. But remember that intermediate term bottoms are processes, not points…

The SP500 is in what Hedgeye calls a Bearish Formation (bearish across all 3 investment durations: TRADE, TREND, and TAIL). In the chart below, Darius Dale and I have outlined the both the TREND (intermediate term) and TAIL (long term) lines of resistance at 1078 and 1144, respectively.

Friday’s breakdown through the long term TAIL line of support (1078) came on accelerating volume, spiking volatility (+20.4% day in the VIX), and a critically negative fundamental (the SPX correlation to private payrolls is 0.72, so the 1st meaningful sequential deceleration in private hiring since December obviously caught Mr. Macro Market’s attention).

Now that anyone with a calculator can look back on April 23rd for what it was (the peak for this stage of the market cycle), our risk management task is to simply find a zone where we can COVER/BUY with a margin of safety that’s tolerable. Given that the Hedgeye Asset Allocation Model currently has a zero percent allocation to US Equities, we can afford to be patient and picky here.

As of 2PM EST, my refreshed immediate term downside target for the SP500 is warning for another lower-low in the 1036-1038 zone. There are still plenty of people who think 1040 is legitimate support (an intraday low in 2010 that didn’t confirm on a closing basis), so look at that for what it is – consensus – because the gravitational suck of the math in my model tends to pull prices to the most excruciating point of the Pain Trade.

In terms of catalysts, most of the “fundamental” ones are going to be negative. In terms of a sentiment catalyst, what we need here is a major US stock market Bull to come out and capitulate (Thomas Lee (JPM), Byron Wien (Blackstone), or Barton Biggs). Then we can pick up the pieces and attempt to build a credible base to bounce back up to test 1078 from again. The lower we go, the more attractive the prospective return on that bounce becomes…


Keith R. McCullough
Chief Executive Officer

Bearish Enough? SP500 Risk Management Levels, Refreshed...  - S P