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The refreshed chart, below, of the S&P 500 shows why it was important to focus on risk last week.

Last Tuesday, the 24th of August, Keith covered five of the fourteen shorts that were in the Hedgeye Virtual Portfolio for three main reasons: Math, Risk/Reward, and Volatility.  All three indicators were telling him that it was time for us, and our clients to book some gains.  Knowing when to get out of a short position is as important as knowing when to put it on in the first place. 

Last Thursday I posted a note titled “BEING BEARISH AT THE RIGHT TIME.”  I highlighted the fact that “we could be setting up for manic media to make the last Friday in August to a ‘the-economy-is-not-as-bad-as-consensus-thinks’ day.” With ISM print yesterday and contained M&A activity, the squeeze higher continues.  Even with yesterday’s news, we still see substantial downside risk to the US economy.

Of the five short positions in the Hedgeye Virtual Portfolio covered last Tuesday, three of them – XLY, XLI, and SPY – squeezed higher yesterday. 

Our immediate-term overbought line is at 1089 with intermediate-term resistance at 1114.  Immediate term support lies down at 1059.

The quote from the 8/25 Early Look bears repeating.  “The best investors in the world do not target returns; they focus on risk.” – Seth Klarman.

Howard Penney

Managing Director