The S&P (SPX) had a range bound week. Over the past month, widening spreads in the credit market have hinted that big money is attempting to position for a breakdown.

The most difficult trades are when you fade an existing trend. If you are short here, you are fading the uptrend that began in March. Given the magnitude of the gains since the March lows, the crowd is programmed to buy any sell-offs. In July, sellers emerged, but they were overwhelmed by buyers. The market has run higher ever since. When sellers re-emerge, buyers could become overwhelmed and a more vicious sell off will ensue. When the inevitable sell off arrives, I will be observing the intensity of the selling. If the selling is fierce, then the pullback will likely evolve into something more substantial–perhaps more substantial than anyone is prepared for.

The biggest trade of 2009 may yet be upon us. Only time will tell.

Last week's range - 60 minute chart

S&P Daily Chart

The Shanghai Composite is consolidating after a sharp sell off.

The US Dollar made a lower low in early August versus the low print in June. New lows on the dollar will drive equities higher. Conversely, a rally in the dollar will cause equity weakness.

After closing at 1025.20 on Friday (21 August) the S&P (SPX) futures have been in a holding pattern. Perhaps Thursday’s GDP report will be the catalyst for a move out of the range. The anticipated number is the preliminary number for the second quarter ending June 30th. GDP is reported 3 times for each quarter: advance (reported July 31 at -1.0%), preliminary and final. The estimate for the preliminary number is at -1.5%.

Number nine, number nine
Industry allows financial imbalance
-The Beatles, Revolution 9

As repeatedly noted, the number 9 is one of significance, and there have been historic market events in the years ending in the number 9.

The ninth month of 2009 is approaching. It is no accident that The Beatles are releasing their digitally remastered catalogue on 9-9-09.

As Jeff Cooper points out, the S&P topped on October 11, 2007. In March of this year, it found support at 666. The March low was 666 days from the October high.

Number nine, number nine
Industry allows financial imbalance

Timing Is Everything

As the days progress, the signs point all in one direction: that risk is vastly undervalued. We may not see it this undervalued for many years to come. My risk aversion positioning remains intact.

Since July 10, I called the flop and the market raised. Coming from a position of strength, I re-raised. The market called and now it’s time for the turn. Whatever the turn is, I’ll commit more.

Speaking to my traders today about which paper to buy, our discussions turned to the advantages of leveraged ETFs. Pro Shares is being sued over these products because of the inherent whipsaw volatility risk (h/t Sober Look).

These products are advantageous in times of extreme volatility because (as the below chart shows) accelerations in velocity are observed.

Acceleration