Please Note: Blog posts are not selected, edited or screened by Seeking Alpha editors.

SDS-SSO pairs trade commentary - July 10, 2009

|Includes: ProShares UltraShort S&P 500 ETF (SDS), SPY, SSO

again, very little change in EOD performance in the S&P 500 index.  the SDS-SSO pairs trade model indicators are still bearish on the index.  stay cautious and keep accumulating as much cash as possible.  the index will not keep going sideways like this forever.

i have a few comments on the overall state of the S&P 500 index according the model.  the model shows that the index is still "over-wound" to the upside and has more room to go down than up.  sure, anything is possible.  in my opinion, going up from here would require a huge amount of conviction that businesses in the index will not only beat but exceedingly beat their projected Q2 earnings and outlook would have to be nothing but rosy.  secondly, global demand for products and services would have to be at all time highs in order to provide the index additional potential to run up another 20% or more from here over the next 4 - 6 weeks.

the index is "over-wound" from this perspective.  just like the natural seasons we experience on earth, economic, business & indexes have defined seasons as well.  those seasons are not as regular and smooth as the earths, but they exist.  no matter how long an economic cycle stays in a particular season, the economy must follow a series of defined seasons in the same order in order to stay viable.  the SDS-SSO geodesic is a reflection of what season the S&P 500 index is in and what season is coming next. 

the geodesic coordinates seem to be saying to me the S&P 500 index is an early stage of decline as it is retracing it's path back toward the other extreme.  the assumptions i have made in constructing the geodesic model for the S&P 500 are based upon the premise that seasonal index changes maintain continuity along the geodesic path independent of time variations.  in other words, the model allows for small retracements along the geodesic but overall motion is harmonic in nature and in order.  (see geodesic chart below).

there are no set rules on how long the index stays in a season, but once it's established a new season it must precess to the next ordered season no matter how long it takes.  if the S&P 500 model geodesic coordinates had already passed back through it's apex and spent a meaningful amount of time ending a season on the otherside of the geodesic and was retracing back the other way, then yeah i'd say we're bound to see significant upside movement in the S&P 500 index.

so, until the geodesic coordinates trace the path to the other side there will inevitably be from this point more down motion in the S&P 500 index than up for quite some time.