The S&P 500 gapped down 6 percent on June 11. We have since traded in a tight range underneath the recent high. We expect price action to eventually resolve to the downside, continuing the first proper correction since the March 23 low.


Total stock market volume continues to lag, which signifies a weak trend. Certain measures of investor sentiment have soared to record high levels. While we can’t be certain of the catalyst, we believe it won’t take a lot to tip the market over.  

There’s enough in the public realm that can unnerve investors:

1) America’s reopening is being poorly managed. While cases in the north are trending down (and New York is no longer the global epicenter of the coronavirus outbreak), cases in the South are still rising. The 7-day average of coronavirus cases has surged more than 30 percent from a week ago. 

2) Europe is considering a ban on American travelers as it reopens borders. Meanwhile, Trump is considering new tariffs on products from Germany, France and the UK. 

3) Current US stimulus is insufficient and policymakers will have to do more to support households and businesses through the pandemic. But there are partisan divisions about what the next fiscal package should include. And there are no plans to do a stimulus bill before the July 3 two-week recess, leaving action on any such measure after July 20. 

4) Beijing is seeing renewed lockdowns after a new outbreak on June 11 which has spread to four provinces. Schools shut a month after reopening. China's brisk recovery has stalled at around 85 percent operating level. The outbreak shows no sign of slowing in developing countries. 

5) The net number of calls minus puts bought to open by small traders is now twice as high as the prior peak in February. Hedge fund net equity exposure has gone up to 52 recent from 34 percent, one the fastest swings and the highest level since September 2018. And Wall Street strategists are now upgrading their price targets. 

Taken together, we think the S&P 500 can decline a minimum of 10 percent from current levels. We advise caution near term. 

We are adding the following shorts today: Retail (XRT), Financials (XLF), Homebuilders (ITB), and Semiconductors (SOXX)—5 percent each. And Salesforce (CRM), Shopify (SHOP), Datadog (DDOG), Expedia (EXPE), and Etsy (ETSY)—3 percent each. 

We are also closing our short bond position (as bonds may rally in the coming risk off phase) and initiating a long USD/MXN position (20% of NAV).