Securities Research Services

Tuesday, October 14, 2008

Short Side Risk Very High

The beauty of the SRS Risk Assessment Meter (RAM) is that it gives us a reasonably accurate view of the risk factors when the market is at extremes.

For example, last May when the market was going up we warned based on the RAM that the market was due for a big correction and that it was best to start looking for short positions. We started warning when the SPY was trading near $138. The SPY was able to trade just over $142 following our warnings trapping in new longs before it turned sharply lower. The RAM did its job.

Now we are at a juncture that is the exact opposite of the situation we had back in May. The RAM is warning that risk is extremely high on the short side and probabilities heavily favor a price rally that allows the market to revert back to its mean. Reversion back to the mean might mean a lower high, but given the extreme sell off we have just experienced a rally that creates a lower high can indeed still be a significant tradable rally.

We don’t know just how far the pullbacks will be here but rest assured probabilities heavily favor the dip buyers here after last week’s intermediate capitulation event.

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