Risk Has Broken Out, But...

On Monday, we warned that risk was squeezing and that we would not be trading the consolidation but the breakout. 2 days later, we have gotten a clear breakout of a weeks-long squeeze. While we were correct in essence (of a breakout), we were wrong on direction; we placed odds on a downside continuation.

 The S&P 500 index (SPX) is our primary benchmark when trading on direction. While we correctly called for a breakout, we were wrong on direction. Regardless, the SPX has 1995 to clear before any serious upside momentum can follow through.   Chart by Business Of Finance

The S&P 500 index (SPX) is our primary benchmark when trading on direction. While we correctly called for a breakout, we were wrong on direction. Regardless, the SPX has 1995 to clear before any serious upside momentum can follow through. 

Chart by Business Of Finance

Late Tuesday evening (just after U.S. session ended), we initiated long positions on risk. Our exposure was gained through a complex of instruments (which we will not reveal), but our key benchmark was the S&P 500 index (SPX).

By early morning on Wednesday, the SPX had already rallied a good 15-20 points, pulling risk assets along with it. Asian equities were well bid; most notably the Nikkei 225 (Japan), as yen carry trades were restarted.

However, we were (and still are at the time of writing), approaching this cautiously because from where we stand, we see another hurdle that has yet to be cleared before we can be outright bullish risk. We took most of our trades off the market when the SPX reached 1989, and are waiting to turn on a dime. So far, that has paid off well. 

For any serious and committed buying, 1995 on the SPX has to be cleared. FX carry looks heavy to us, and are also at their respective pivotal zones. If we were to see continued ramp in risk, we want to see higher correlations and lower implied volatility.

So far so good. Selling into this short term rally has been minimal. Mainstream media has been reporting on U.S. equity indices coming out of their corrections, which might better sentiment on the street at the very least. 

Going forward, we're obviously looking for reasons to be on the long side of the market, but are well aware of the volatility that can strike at any instance. And yes, keep watching China.