Skip to main content

Morning Update

After selling off on Apple’s earnings miss in the overnight session, the S&P 500 futures are back to unchanged on a better than expected Q3 GDP report. The top line number in the report was a 2.02% annualized Y/Y increase in GDP, which beat expectations of a 1.80% increase. However, digging into the report shows that this was driven by a much larger than expected increase in government spending which offset lower than expected personal consumption. Below is a graphic detailing the components of GDP growth over the past few years, and as you can see today’s report has the largest increase in government spending of all of them. For a government running a $1 trillion budget deficit every year we would like to see personal consumption driving the economy, not government spending.




The SPDR Gold Trust (GLD) looks poised to post a fourth down week in a row, which has prompted some option traders to begin picking a bottom. Yesterday the largest GLD trade was the sale of 20,500 Nov. 162 puts for $0.77. Selling a put allows you to pick a level you are willing to buy the stock at and collect premium while you wait for the stock to come to your entry. This option trade allows you to effectively buy GLD at 161.23, which coincides with the 200-day moving average at 161.44.

The recent sell off in gold can be attributed to moderate strength in the dollar and risk asset selling. Since the beginning of October Gold, Crude Oil, the S&P 500, and the 10-year bond are all lower while the US dollar index is higher. In the short term I would not be surprised to see gold continue to trade a bit lower. However, once the Fed’s QE-infinity has run for a few months the monetary base will be much higher and increasing inflation expectations are likely to take GLD higher. Picking a bottom in a market is always tough but for a long-term investor buying GLD around the 200-day moving average is likely to look like a brilliant trade a few years. Worldwide central bank liquidity programs mean that the fundamentals driving gold’s rally over the past few years are still very much in place; it is only a matter of time before the effects of quantitative easing are seen in the economic data and send gold higher.

Comments

Popular posts from this blog

FED Rate Hikes Could Cause Unintended Volatility Shock

Last week the Federal Open Market Committee surprised no one when they raised rates 0.25 basis points to increase rates to between 1% and 1.25%.  What did surprise the market, was the revelation that the FED is committed to normalize rates, even if inflation does not meet their target.  This was reiterated this week in a speech by William Dudley, President of the Federal Reserve Bank of New York, who stated he feels the FED needs to raise rates, despite low inflation, to be ready to act if the economy does slow down.
The market has been quick to respond, and nothing was hit harder by a reduction in inflation expectations than commodities.  Gold, since the announcement, is lower by 2.39%, and oil is down -3.18%.  Crude futures have broken their upward trend line and appear poised to test the previous low of $39.56.
While, oil has been under pressure all year, the S&P 500 does not seem to care, as it continues to make all-time highs.  Oil is down 23% year to date, while the S&P…

Gold and Treasuries Say “RISK OFF”, But VIX Says "RISK ON"

Today we are seeing a modest rebound in the market after yesterday’s small selloff.  Volatility remains extremely low, with the VIX hovering around 10.  It’s important for traders to recognize how low the VIX has been lately.  Since 2010, the VIX has only closed below 10 five times, and each of those five times has come in the last month.                   However, the market is not without risks right now.  Gold has rallied 6.5% since May 9th.  Treasuries have rallied, pushing rates to below 2.15.  So, the market is currently in a risk off mode while equities are in a period of historically low risk.  The VVIX (the VIX of the VIX), for its part, is not sounding the all clear signal, 87 is in the medium range for VIX volatility.  Tomorrow we have a potential market moving event with James Comey’s testimony to Congress.  The last time Comey’s name was in the news, we saw the VIX move from 10.5 to over 15 in one trading day (a 50% increase) on a day where the market was down over 2%.  …

Markets Soft without Stimulus

Markets around the world pulled back the reigns as central banks look to taper quantitative easing. Japan’s central bank decided to leave their current pace of monetary policy unchecked, which has effectively cut the Nikkei down 1.5% on the day, affecting nearly every market in-between, scaring the DJIA 165 points off the start this morning. US Treasuries have now notched the highest yield in 14 months on the 10 year note.

This morning 55,257 EEM July 35 puts were purchased by a trader for $0.29 each, costing him a large $1,602,453. This is a bearish move on the Emerging Markets ETF, with expectations that by the July expiration, the price of EEM will dip below $34.71. EEM opened today at $39.32 and if this trader was to pass the breakeven point, the ETF would have to drop by more than 11.7% within a little over a month.

EEM opened today 1.9% lower than its closing price yesterday and since the 52-week high the ETF experienced in early January, it has lowered by over 13%. While this …