Bears have been getting burned trying to bet against this market, which has made fools of everyone.
At this point, your gut might be to go short, but all the carcasses on the side of the road have scared you off.
To this effect Waverly Advisors has put out a note on the spread between the S&P 500 futures and Russell 2000 today futures.
“Small caps have outperformed large caps by a wide margin during the past 4 quarters and, despite some undeniable positive economic developments and declining yields on low-grade corporate debt, we currently see them as richly priced from a historical perspective (including the typical sustained outperformance during economic recovery periods). In brief, we see a substantial portion of the current spread between large and small cap US equities as a function of increased speculative appetite that can rapidly moderate in the face of macro headwinds. “
“Tactically, the spread appears overextended from a historical perspective and we are initiating a position here cautiously. As with all mean-reversion plays, the goal is to leave sufficiently wide parameters between legs as we scale into our position.”
Again, this is not a directional bet on the market, but a bet on the reversal of this overextended situation that could pay off even if the market doesn’t turn around, but will likely pay of big if the market does turn around.
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