Short of a major decline in inflation expectations, the recent sell-off in gold should subside. Historically GLD uses 2 standard deviations from the 50day moving average as support after major sell offs (see second chart below).
Thursday, December 29, 2011
Gold - Comparing 5yr Inflation to Gold Prices
Two indicators I use to understand the price action of Gold are the 5yr inflation breakeven rates (the rate CPI would need to realize to justify 5yr TIPS prices) and the 5yr TIPS real yield. The chart is included below.
Short of a major decline in inflation expectations, the recent sell-off in gold should subside. Historically GLD uses 2 standard deviations from the 50day moving average as support after major sell offs (see second chart below).
Short of a major decline in inflation expectations, the recent sell-off in gold should subside. Historically GLD uses 2 standard deviations from the 50day moving average as support after major sell offs (see second chart below).
Wednesday, December 28, 2011
Long EUR Calls - Too Cheap To Ignore
The EURUSD (ETF Ticker : FXE) has been under significant pressure for the last 2 months as the outlook for growth, stability, and leadership out of the EU has been disappointing at best. Rates/CDS on sovereigns, equity valuations in the EU, and liquidity metrics (libor, EUR basis) are still showing signs of stress, but have rebounded off recent extremes.
The EUR should benefit if economic conditions improved as expectations of a break-up of the Euro-zone and/or the ECB doing a round of Quantitative Easing would decrease.
An interesting trade is the FXE Jan 131 calls for $0.70 (11.9 vol). If FXE retests the 50 day moving average ($134.3) then that option will be worth $3.3+. I think 11.9 implied volatility for FXE is too cheap based both on historical price action and the uncertainty around the ECB actions / Euro-zone crisis. If volatility goes from 11.9 to 12.9 while everything else is constant, the option will increase by $0.11 (16%).
Included below is a historical price / implied volatility chart and a regression of SPY vx FXE. Note the correlation of FXE to SPY is around 60, so betting on FXE trending higher with SPYs is probable.
FXE Historical Price / Volatility Chart
FXE is oversold, testing the 2 standard deviations from the 50 day moving average.
FXE Regression vs SPY - 60 correlation
The EUR should benefit if economic conditions improved as expectations of a break-up of the Euro-zone and/or the ECB doing a round of Quantitative Easing would decrease.
An interesting trade is the FXE Jan 131 calls for $0.70 (11.9 vol). If FXE retests the 50 day moving average ($134.3) then that option will be worth $3.3+. I think 11.9 implied volatility for FXE is too cheap based both on historical price action and the uncertainty around the ECB actions / Euro-zone crisis. If volatility goes from 11.9 to 12.9 while everything else is constant, the option will increase by $0.11 (16%).
Included below is a historical price / implied volatility chart and a regression of SPY vx FXE. Note the correlation of FXE to SPY is around 60, so betting on FXE trending higher with SPYs is probable.
FXE Historical Price / Volatility Chart
FXE is oversold, testing the 2 standard deviations from the 50 day moving average.
FXE Regression vs SPY - 60 correlation
Short Interest Ratio - S&P Sectors
Included below is the short interest ratio (SI ratio) for the S&P 500 by sector. For the two weeks from 11/30 to 12/15 there was a significant decrease in telecom and materials while industrials trended higher. Although the SI ratio don't predict future price action, they do provide insight into how investors are currently positioned.
Below is a regression (for the non-math majors - this is used to show historical relationships between a dependent and independent variable) between the price of SPYs and the stock's SI ratio.
Below is a regression (for the non-math majors - this is used to show historical relationships between a dependent and independent variable) between the price of SPYs and the stock's SI ratio.
Tuesday, December 27, 2011
Gold and Silver - oversold but where are the bulls?
Long gold has been one of my favorite trades since QE1 and I think it will continue to be a good trade until governments stop printing money / providing cheap liquidity to banks, which shouldn't be for a couple of years according to the Fed (LINK).
To all the gold bears - yes gold does act as a source of cash during periods of deleveraging / derisking, so there could be a better entry point to get long gold. This is a good entry point for gold calls because you can take advantage of the recent sell-off both in price and implied volatility. Even if gold goes lower you can make money if it does so at a rapid pace as vol should spike.
I tend to like the bull thesis around gold more than silver as central banks continue to buy gold at these levels (LINK). Silver is more volatile and therefore could outperform gold, but I'm looking for the better risk / reward.
GLD Jan $160 calls which trade around $1 (18vol) would be worth $5+ if GLD retests the 50 day moving average of $165.
Technical Charts - GLD and SLV are oversold (~2 standard devations from 50d moving average)
Price and Implied Volatility Charts - both price and vol have been heading lower
To all the gold bears - yes gold does act as a source of cash during periods of deleveraging / derisking, so there could be a better entry point to get long gold. This is a good entry point for gold calls because you can take advantage of the recent sell-off both in price and implied volatility. Even if gold goes lower you can make money if it does so at a rapid pace as vol should spike.
I tend to like the bull thesis around gold more than silver as central banks continue to buy gold at these levels (LINK). Silver is more volatile and therefore could outperform gold, but I'm looking for the better risk / reward.
GLD Jan $160 calls which trade around $1 (18vol) would be worth $5+ if GLD retests the 50 day moving average of $165.
Technical Charts - GLD and SLV are oversold (~2 standard devations from 50d moving average)
Price and Implied Volatility Charts - both price and vol have been heading lower
Friday, December 23, 2011
Resources / Education - Updated
http://chartemporium.blogspot.com/p/resources-education.html
Updated online resources / book list. Goal of the blog would be to talk about the mkt / trades while promoting education on the markets.
Updated online resources / book list. Goal of the blog would be to talk about the mkt / trades while promoting education on the markets.
TLT vol and skew selling off
If you think central banks continue to ease (QE, USD swap lines, LTRO, ... ) taking a stab at treasuries to the upside through calls is becoming fairly cheap. Also skew is selling off, which sets up nicely for call spread . Historically as skew sells off, treasuries tend to rally shortly after. Probably just a coincidence, but worth noting.
note: Skew is the difference between puts and calls on an implied vol basis. I usually look at +1/-1 sigma ivol as it normalizes moves across asset classes. (a 1% move in gold is less likely than a 1% move in silver).
note: Skew is the difference between puts and calls on an implied vol basis. I usually look at +1/-1 sigma ivol as it normalizes moves across asset classes. (a 1% move in gold is less likely than a 1% move in silver).
XLU (S&P Utilities) Recent Outperformance
XLU (S&P Utilities) is up 15% YTD and outperformed the S&P by 14%. A lot of the out-performance can be attributed to the defensive positioning of the market, recent slightly favorable EPA ruling and the market's desire to chase yields (dividends in this case). XLU puts make sense as vol has become cheap (in my view relative to mkt risks) and XLU should under perform the market if we rip into Q1 2012 or sell off with the broader mkt.
Looking for a cheap hedge - try JNK
Vol across the board is cheap. Maybe not cheap to realized going into a holiday weekend, but based on the countless number of tail risks in the market - Sov crisis, China slowing, potential US economic head-fake, Iran (and now Iraq), and not to mention the every growing unprecedented level of intervention by Central Banks. Just because it looks like we might close 2011 on recent highs doesn't mean January or February won't be a mess. Check out JNK Jan puts ahead of the new year for around 7 vol.
Thursday, December 22, 2011
Risk On until 2012?
Investors are becoming complacent with market risks as all eyes are focused on year end. S&P
3m ATM vol is now trading below 23, while Dec 31 vol trades below 19.
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