Diary of a Financier

SPY’s bearish evolution begins correction

In Capital Markets on Thu 23 Jan 2014 at 18:00

Today saw the expected followthrough in the S&P 500’s bearish setup, with SPY hitting as low as -1.35% intraday before recovering to close -82bps.  This brings us closer to the market’s first correction in over 400 days.

I first noted the potential for a correction two weeks ago, which was punctuated by a multifactor sell signal shortly thereafter.  Given that preface, a bearish technical setup managed to develop in SPY’s chart fractals last week.

SPY’s 15-minute remains the critical guide.  I caught its evolution into a fulcrum top earlier this week, when I pinpointed the pivot points.  Today’s breakdown was in neat accordance with that technical pattern.

To wit, SPY’s 15min shows the tilted fulcrum top that gapped-down today, evolving into a complex fulcrum top which then bounced off its own right shoulder support intraday–the low marked by a shorter-term 1min H&S bottom:

SPY 15min/1min

SPY 15min/1min

Both of those intraday fractals show cause for SPY daily/weeklySPY to now fill the gap up >$184.  Thereafter, the daily and weekly charts both show a moonshot rising wedge confronted by bear divergence. This primary setup should be sufficient to force a correction imminently.

~~~~

Here’s where a portfolio manager can’t get greedy trying to wring every last penny out of the market before a drawdown.  Psychologically, this short term bounce will be very taxing.  Anxiety will test patience.

As guided by that self-awareness and my own investing rules, I’m merely focused on bringing our portfolio back down to benchmark-weight after more than a year of overweighting risk.

Why reduce risk exposures merely to benchmark-weight? Well, first, I have obvious convictions as to the direction of this market, but our convictions can engender so many biases. When our mood is poor, we see every rose for its thorns.

Second, no matter how factually accurate or brilliant my analyses, the market may move against me.

Third, I’m still bullish on the longer-term. Even if I weren’t, this is a bull market, and even if it weren’t, optimism prevails 95% of the time. That means not only do I have a high probability of being wrong about ST bearishness, but also a correction is peanuts in the grand scheme of things.

So, I’ve probabilistically-weighted these factors, and I’m therefore comfortable with a benchmark-weight allocation until I see further confirmation of my thesis.

I managed to sell a couple more holdings into an ephemeral intraday bounce today (I & II), which brings our portfolio ever so closer to my target positioning. We sit at 64/27/9 vs 60/40 benchmark (stocks/bonds/cash), with beta up at 0.86 vs 0.76 benchmark, and sigma 0.96 vs 0.59.

I have a plan in place to keep selling a couple more equity singlenames to bring us just under benchmark-weight, while also continuing to swap some of our credit exposures for munis.

–Romeo

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  1. $SPY continues correction today, -3.6% drawdown so far…

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