Skip to main content

Morning Update

Yesterday the market sold off on news that Obama has been reelected and the announcement by Draghi that Germany’s economy is beginning to suffer from the European debt crisis. CNBC showed scenes of violent riots in Greece throughout the day, which also helped drive the market downward. The Greek riots were due to parliament’s austerity vote last night, which unsurprisingly passed. Today attention will be focused back on the US. Jobless claims this morning came in at 355K versus 370K expected and 363K last week. The US balance of trade was also released, coming in at -$41.5B versus -$45.4B expected and -$43.8B last month. The S&P 500 futures are modestly higher ahead of the market open though the better than expected data did not have a profound effect on them. Today we will be closely watching the S&P’s price action around 1402, which is the 100-day moving average, and 1380, which is the 200-day moving average. The market looks like it wants to test 1380, though it could test the 100-day moving average first to get some relief from yesterday’s sharp selloff.

One sector immune from yesterday’s sell off was the gold miners, who finished the day up 1.5% versus the SPY’s 2.3% slide. Physical gold was virtually unchanged in yesterday’s session though it jumped 1.8% on election Tuesday. The miner’s relative strength did not go unnoticed by option traders, who bought upside calls in GDX yesterday. The biggest trade of the day was the purchase of 50,000 Nov. 56 calls for $0.06, the purchase of 10,000 Nov. 52 calls for $0.56 and the purchase of 5,000 Nov. 50 puts for $0.91 with the ETF trading at 50.50. This is a bullish position that will profit from an explosive move upward in GDX over the next two weeks. The breakeven points to this trade are 52.68 (4.3% higher) on the upside and 43.18 (14.5% lower) on the downside. While this trade will make money on a large move lower, this spread was likely designed to be a bullish play that is hedged to reduce losses on the downside.

The reason for this bullishness on the gold mining sector is likely tied to Obama’s reelection, which has traders expecting Ben Bernanke to remain at the Fed and easy money policies to continue. Low interest rates and the potential for inflation down the road are supportive of higher gold prices, which in turn will benefit the gold miners. However, a rise in gold prices does not necessarily translate into an equal rise in GDX. Year to date gold is up 6.8% while GDX is down 5.1%. For this reason I like to trade gold itself, not the miners.

During the first four years of Obama’s presidency gold appreciated 136%, and high reelection means four more years of the same policies that drove gold higher. In the long run I am bullish on gold and expect to see it move higher. However, I trade gold using an economic model which suggests that current gold is trading at fair value. Therefore I am hesitant to buy deep out of the money options on gold or the gold miners, and would recommend anyone doing so to keep their risk controlled with tight hedges.


Popular posts from this blog

Wake Me Up When September Ends

The fiscal year for the U.S. Government ends September 30th, 2017. Which is something market participants could care less about if not for, sometime near that date, Congress needs to raise the debt ceiling. Missing that deadline would result in a self-inflicted financial wound that would send shock-waves throughout global markets.  The U.S. Government has been paying off debt since the Andrew Jackson administration without missing a single payment. Raising the debt ceiling is a routine vote.

In fact, with the polarized Washington we have seen in recent years, it is happening a lot more frequently, as Congress has only once passed a budget in the past eight years. In lieu of a budget, Congress passes what is known as a continuing resolution.  A continuing resolution is a type of legislation in which Congress decides to let last year’s budget continue as this year’s budget. Nevertheless, a continuing resolution is incomplete, as it does not allow for the government to spend the money a…

I would like to bet ten tens on the tenth horse in the tenth race, please.

"I would like to bet ten tens on the tenth horse in the tenth race, please."

Last summer, on a warm cloudy day June 11, 2016 in Elmont New York, a good friend of mine (Rob) confidently walked up to the cashier at Belmont and spoke those famous words.  Ten Tens on Ten in the Tenth Race.  In fact, it had been decided it months earlier. We had been discussing hosting his bachelor party in New York, go to the Belmont Stakes, and watch a Yankees vs Tigers game and Rob convinced the group to go to New York by proudly proclaimed his prophecy.  I had almost forgotten about this bold prediction when I witnessed him at the register, but when I looked up, and saw Flintshire, the 10th horse in the race upcoming race was the favorite.  “What could possibly go wrong?”  I thought to myself (an options trader who bought a racing program attempting to handicap and gain an ‘edge’ in the previous nine races unsuccessfully).  I went to a pretzel vendor and changed 5 twenties into ten tens, wal…

Is the KCJ Foreshadowing a 2008 Repeat?

The CBOE Correlation Index (KCJ) is close to the lowest level we have seen since it was first listed in 2007. The KCJ measures the implied movement of the S&P 500 components options, compared to the implied movement of the S&P 500 index options. Simply put, the higher the number, the more likely all stocks are going to move together. Conversely, a low number will be characterized by sector rotation, and flat markets; one sector moves higher, another moves lower. 
Correlation, for lack of a better term, is correlated with volatility. Not surprisingly, 30-day S&P 500 historical volatility is near the low level of 6.5%. Currently at 33.5, KCJ is sitting close to rock bottom, lower than where it was in 2007, (but not lower than where Lindsay Lohan was in 2007). 
So far this year, the market has been able to grind higher, characterized by leadership in FANG(Facebook Apple/Amazon, Netflix, Google) and sector rotation. As the summer hit, FANG has slowed with GOOGL and AMZN hitting…