Per our recent alerts/posts, as of today we have been filled on our limit order to buy the SPY January 2021 $275 Puts @ $28 & $30 for a total allocation of now being 10% short with about 65% cash left.
So as we mentioned earlier, on a technical basis, the $SPY has hit the 50% retracement level. In fact, it shot well passed it. That has me a bit concerned at the moment. Again, it would be entirely unprecedented if the SPY went on to complete a full v-recovery; It has never occurred after a -35.63% crash. Yes it happened in 2018 but that was after a -20% correction. Not once have we ever seen a v-recovery after the market peaks at all-times & then crashes 36%. That's just not how the market trades. What's more, the worst is still yet to come. It would make no sense for the market to go back to peak valuations when future expectations have completely been obliterated on a relative basis. What we thought we knew about growth and earnings for 2020 and 2021 with the $SPY at $337 has changed markedly from where it is today. So there's absolute no basis for the SPY to go back to $337 in a hurry. It would make no sense. And that's the next major line of resistance. All-time highs. We have psychological resistance at $300. But all-time highs is the real resistance.
I understand there is the potential for a v-recovery, but there is really no fundamental basis for that whatsoever. Not only that, there's no technical basis for it either. Again, you don't get -36% sell-offs that go right into a V-recovery.
On the other hand, what we have seen plenty of times in the past is 50% retracements ahead of 2nd and 3rd legs lower.
Take 2018 for example. In 2018, the SPY had a big sell-off and a huge 50% retracement. You know what happened next? It went all the way back to the lows and then rebounded yet again to the 50% retracement and then finally had a third leg down that was more brutal than the first leg.
If applied to today, it would be the same as if the SPY fell all the way back down to $220, rebounded again to $280 -- forming a potential double-bottom breakout -- and then it decided to fall a third time to $170 this time. That's what happened in 2018. Take a look below:
The crazy part is that the SPY then went on to complete a full v-recovery which made no sense whatsoever back then. Remember Apple? Apple went from selling off very heavily where it crashed 30% in like 12-days in one moment to a full blown v-recovery the next. We didn't even have a retest of the lows on an intraday basis. Apple literally went from absolute low point to a full blown rally. Luckily we caught the very lows of that crash, but that's neither here nor there.
My only concern regarding the potential for a V-Recovery is that it's happened before in relatively close proximity to this crash time-wise. If this happened in some fluke occurrence in 1982 it would be one thing. But the fact we saw this action just last year has me thinking about "what if." That's also why we are not going all-in short. That's why we are only allocating a smaller short position.
To be honest, if it weren't for this v-recovery b.s. we saw last year, I probably would be taking full January $275 short position in the SPY. Because all logic and reason points to a peak here. Like I just don't see how the market is going to yawn off earnings. Earnings are going to be a disaster and forecasts are going to be pretty grim. I just don't see how anyone would sensibly hold through earnings with the SPY at $280. Think about it like this. The SPY at $280 is only 16% below its highs! That's it. Only 16% below its highs. So what exactly is the upside here? That we're going to go back to the all-time highs? On what basis. Stocks were already overvalued and we're going to go back to those overvalued highs on this economic uncertainty? That's crazy talk. Still, this v-recovery we saw last year is concerning and it's why we're going to be reserved in how much exposure we're taking. We could see a recovery and crash two times over by then.
And yet, the market tends to most always fool most of the people most of the time. That's an axiom we always want to recall.
Right now we're sitting on about 65% cash now which brings our short position up to about 10%. We'll add a bit more into our puts if the SPY goes up next week. Again, I just don't see how we get a recovery without a retest of the lows at some point. Even if we don't get a retest, the SPY is up massively in just a week. Typically, that's going to see a retracement.
I'm pretty sure all of these actions we are taking are going to be rewarded. I mean last year's stuff is clouding things a bit, but the reality is we just saw another week of 6 million jobless claims. How is the market going to just brush that off. Two weeks in a row of record unemployment claims. I don't care how temporary this is. That was not baked into the cake with the SPY at $337 and with Apple at $325.