Kass: Market Is Underpricing Risk…Again

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by Doug Kass

* Adding to my large SPY short
* Downside risk grows relative to upside reward

I have been shorting (on a scale higher) SPDR S&P 500 ETF (SPY) most of the day — adding to an already large short position.

There are a number of factors contributing to this move:

* Narrow market leadership. (We are back to the FAANG — Facebook (FB) , Amazon (AMZN) , Apple (AAPL) , Netflix (NFLX) and Alphabet (GOOGL) — market).
* The continued rise in short term interest rates. (The 2-year U.S. note yield is +1.5 basis points to 2.39%.)
* Seeing more investor complacency (anecdotally in the business media and elsewhere) — after the rally off of the lows.
* The rise in gold looks solid.
* Disappointing action in financials. (Though I continue to buy)

Finally, with S&P cash now at 2705 — the downside risk relative to the upside reward seems to argue in favor of a net short exposure.

Remember, I expect a 2200-2850 trading range for 2018, with a “fair market value” of about 2400.

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So according to my calculus, currently, there is about 500 S&P points of downside risk (to the low end of my trading range) and 300 S&P points of risk to “fair market value” — as compared to the upside of only approximately 150 S&P points.

* Add the recent advance in oil stocks and a breakout in commodities as more reasons to be short term bearish

 

I can add two more factors that are contributing to my short term bearishness:

* Oil stocks have been the leading (non-FANG) sector in the stock market over the last few days/weeks – obviously in response to the rise in crude oil prices. Historically, a market being led by oil stocks is close to a top of what we can characterize as a mature Bull Market.

* As noted by my pal Peter Boockvar this morning, the CRB commodity index has broken out and now sits at the highest level since October, 2015. It’s not only oil – nickel, aluminum and other non-precious metals are rising. Peter also relates that the US ten year inflation breakeven is up by almost 1 basis point – and at the highest level since September, 2014. As noted earlier, the two year US note yield is now over 2.42%.

Caution is advised.

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Doug Kass

Since 2004 Doug Kass has served as President of Seabreeze Partners Management, Inc. He runs a hedge fund and individual managed accounts, co-authored “Citibank: The Ralph Nader Report” with Ralph Nader and the Center for the Study of Responsive Law in the 1970s and wrote “Doug Kass: A Life on the Street” two years ago (John Wiley). Since 2003 Mr. Kass served as a guest host on CNBC’s “Squawk Box” and has guest hosted Bloomberg’s “Market Surveillance” for the last five years. Along with Jim Cramer, Doug is the principal contributor to Real Money Pro.

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