Crash or Correction? SP500 Risk Management Levels, Refreshed...

The only way to have another stock market crash is for there to be a suspension of belief that we can’t crash again. Markets don’t trade on valuation – they trade on expectations. With fleeting low volume rallies to lower-highs in the past few days, the probability of this correction becoming a crash is going up.


Hedgeye defines a crash as a -20% move from a measurable peak-to-trough. Since the 2008 crash, we have not had one. From the April 23rd, 2010 cycle-peak of 1217 to the June 7th closing-low of 1050, we had an expedited -13.7% correction. The crash zone from 1217 is well below the 1000 line at 974, so keep that reference point in mind. That’s the Pain Trade point for the bulls.


If we hadn’t seen 2010 crashes already in major global equity markets like China, Spain, and Italy, the probability for mean reversion would be lower. If our forecast for another breakdown in the US Dollar based on US sovereign deficit and debt risks weren’t concerning us, the probability for lower-lows versus 1050 would also be lower.


If there weren’t so many ifs in our risk management process, we are not quite sure what we would keep us busy throughout the day. If consensus was Bearish Enough, the SP500 wouldn’t be up 2% today either. From a risk management perspective, nothing of consequence has really changed here today, so we’re still a net seller on strength.


Our long term TAIL line of resistance is now at 1081 and has proven to be a formidable wall today. We see no downside support from here to 1037. From 1081 to 1037 = -4.1%. If that were to happen tomorrow, I think it will definitely get people’s attention and put the crash scenario in play. Lots of ifs…


The monthly US budget deficit for May was released at $136 BILLION DOLLARS. Add that to April’s $83 BILLION DOLLARS and I have $219 BILLION reasons to not trust that the US Government should be entrusted with my hard earned capital being put at risk. Our asset allocation to US Equities remains zero percent as a result.



Keith R. McCullough
Chief Executive Officer


Crash or Correction? SP500 Risk Management Levels, Refreshed... - S P

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