Thread by @maxjanderson

How to spot the perfect entry point to short $SPX

This formula caught 3 of the best short oppty's of 2020, to the day, with 1 day's advance warning:

➡️ Jan 3
➡️ Apr 20
➡️ Aug 15

Here's how it works and how you can use it too

👇

If you're not familiar with Net Liquidity 💦, and $SPX's remarkable correlation to it, take a moment to read this thread:

https://twitter.com/maxjanderson/status/1546472693234470912?s=20&t=hMSYqKQcn2-Nnmx_aKQV8g

Now that you're back, let's continue...

Net Liquidity 💦 sets the fair value for $SPX, or put another way, its mean reversion target

However, other factors (sentiment, positioning, world events, etc) can drive extreme *temporary* deviations from this level

By determining fair value for $SPX based on Net Liquidity 💦, and then subtracting that from the actual level of SPX, we get a diff

This diff is positive when SPX is overvalued and negative when SPX is undervalued

The idea that follows is simple:

Short when $SPX reaches extreme levels of overvaluation, and close out when SPX returns to being undervalued

Here's the formulas I currently use to determine fair value:

Fair Value = (Fed Bal Sheet - TGA - RRP)/1.1 - 1625

And here's the trading rules I currently follow:

Short when diff of $SPX - Fair Value > 350
Close when diff of $SPX - Fair Value < 150

When one of these rules is triggered upon market close on a given day, trades are entered at open of the following day

Here are the results so far in 2022:

- Short Jan 3 / close Mar 7 (+12.4%)
- Short Apr 20 / close Jun 17 (+17.6%)
- Short Aug 15 (+16.6% so far, still running)

Edit:

1st tweet should say 2022, not 2020

https://twitter.com/maxjanderson/status/1576609692675362817