Quick Trade Update

Really quick trade update to help you manage risk during this market sell off.

I’ve been managing a short in S&P futures all week — executed early Monday morning during the Asian session, shortly after publishing the Weekly Edge.

I was very fortunate with my execution, getting the whole package on at 5,980.

That has been a great hedge for my long equity beta and short volatility exposures that are mainstays of my portfolio. However, this trade/hedge now represents a sizeable unrealized gain which I don’t want to give back to Mr. Market.

Today I executed a ratio spread to lock in the gains on my short position, and at the same time gain upside exposure.

I sold ATM puts struck at 5,750 and bought OTM calls struck at 5,880 and did the whole package for a small credit. If we continue selling off (entirely possible) my gains won’t increase. However, if we experience a sharp rally (inevitable at some point) then I’m looking pretty as a picture.

Speaking of pictures, during times like this it is always helpful to observe the bigger picture.

5 Year Trend

If we calculate a linear regression of daily closing prices from 1 Jan 2020 to 31 December 2024, we get the chart below. This chart shows both the trend (dotted line) and 2 standard deviations above/below trend.

Today, the mean of the 5-year trend is 5,500. It is impossible to know whether we will get there, but you should at least be aware of this key level.

1 Year Trend

The chart below applies the same principles, this time based on a linear regression of daily closing prices from 1 January 2024 to 31 December 2024.

We have broken down from the channel, which is one of the reasons for accelerated selling.

If we are still in a bull market, and based on economic data there is no reason to think otherwise, sharp and painful pullbacks are par for the course. They are dips to be bought.

1 Month Trend

Lastly, this chart shows the 1 month liner regression of daily closing prices. Yes, it is ugly!

We were already setup for bearish trend going into this week, and we’ve broken out of the channel to the downside.

We can begin to anticipate what the trend might look like next week. We usually calculated the monthly trend based on the 4 prior weeks of price data. However, if we calculate the trend based on the last 3 weeks and 2 days (from 10 February to 4 March) we get the pink channel below.

Clearly, the slope of the pink channel is very steep to the downside. When expectations for the future path of prices get extreme, whether to the upside or the downside, it doesn’t take much to get a move which upsets expectations and forces poorly positioned traders to cover.