The Short Side

After 19%+ in two months, oversold conditions have run overbought.

So far to be short in 2019 has been a less than fruitful venture, to say the least. Since Christmas day the S&P500 took off and never looked back. Breaking through 2,500 2,600 2,700, and while closing above 2,800 a couple times in the past week, the environment looks to have changed.

Throughout Oct and Nov of last year, 2,817 marked a significant technical resistance to which the S&P has yet to break. Its therefore no surprise that were seeing some weakness as the index again attempts to trade through the resistance.

SPX 3rd Test of 2817

Monday opened with the S&P ticking up to 2,817 and then like a charm selling off throughout the day. The S&P sold off 1.70% intraday from the peak to the trough of the days move, bouncing off the trends support line and closing the day off 0.37% from Fridays close. Tuesdays price action was little to call home about.

SPX testing 2817 on hourly bars

While the short side has not paid particularly well recently, its starting to look a little more attractive. The Risk/Reward now seems to be tilting in favor of the bears.

 

For the Bulls to be right we would need to see a definitive price break above 2,817, until then we could be facing a short term top, or worst of all… sideways price action 🤮.

If you missed the last 20%, its quite likely you missed the boat. While economic data continues to show increasing weakness in the Euro-zone and throughout China, risk assets may incur headwinds as earnings revisions continue to reflect the weakening global demand.

VIX

The VIX volatility index has collapsed from top ticking $36 down to ~$15 where it stands today. Trading right around where it had throughout most of 2018. Somehow I don’t think volatility today should be that low…

Of course, equities could continue to ignore the signs of global slowdown, participants could continue to believe Trumps rhetoric about a US-China trade deal, and the S&P could continue its rip higher (possibly to make new highs?).

I am constantly reminded of the wise words once spoke by John Maynard Keynes: “The market can remain irrational longer than you can remain solvent.” 

Now while I try my best to remain solvent… I am of the camp that the 10 year Bull market has has its day, and investors should expected lower average returns for the next couple years. It would seem too easy if this bout in December was the extent of the Bear market and only smooth sailing was ahead.

I Reminisce on the wise words of Jesse Livermore who stated that “In a bull market bear factors are ignored.” and reciprocally that in a bear market bull factors should be ignored. Watch to see how the news headlines wrap around the price action in the coming weeks as you attempt to determine which direction the “line of lease resistance”.

Thanks for reading.

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