Saturday, October 30, 2010

Election priced in or not?

Tuesday is election day. The question for traders is whether the anticipated results are baked into current prices, or not.

Intrade tracks odds on the election (link) and many other events. Presently the lead item on the page is whether the Republicans will have a House majority. Right now the betting odds are 92% in favor, 8% against. So at least for the Intrade population, that result is 92% baked in.

The caveats are that Intrade bets are small and may not be indicative of the expectations of major stock, bond or gold market participants. Intrade is also likely to be all U.S. participants, while most markets are now global markets. Still, Intrade can indicate whether a result was "surprise" or not.

The election is like a major earnings report or economic data release. If the results are in line with expectations, there may be chatter about a whisper number or some part of the result that is more closely looked at.

Another thing to look at is VIX and option premiums. VIX may have a slight premium due to the election, but not a big one. So option players don't expect a big move either way from election day. I'd guess there is a bit of turbulence, next week, but not much more than that.

Monday, October 25, 2010

Buy TBT (sell puts)

Buy TBT via selling Nov 30 puts, TBT@ 33.2. Strong support at the lows around 30. I am already short TLT Nov 94 puts, so this makes the overall bond position a short strangle.

TBT/TLT equivalent to short strangle

Thursday, October 21, 2010

Fibonacci time and price

Most technicians use the key Fibonacci retracement ratios of 23.6%, 38.2%, 50%, 61.8% and 100%, when measuring price objectives. The reaction to a move is often a percentage retracement.

GLD has had a good run since 7/28. Like I said, virtually every technician is looking at the Fibonacci price levels. Not many use Fibonacci in regards to time. When price is uncertain, time can be a valuable tool. I see price as uncertain, because much of the gold rally was driven by the currency market.

Using 38% of the time of the recent gold rally takes us to about November 4th, for a projected long entry point.

Wednesday, October 20, 2010

Babak on the Golden Cross

The "death cross" got a lot of press this summer. Now that the opposite is happening, not so much. Over at Traders Narrative, Babak has an entry about the "golden cross" (link).

... it is important to remember that these patterns hold true on average - not every single time. Like seasonality or the presidential cycle, they hold powerful sway over the market but are never to be considered as a dictatorial mandate.

As well, according to a study done by Jason Goepfert, when we have similar back-to-back signals - that is reversing a “death cross” with a “golden cross” within a 3 month period. The results are lackluster, showing that within a year the S&P 500 index is slightly higher (+1.4%) with a 60% positive occurrence.

Sunday, October 17, 2010

4-0 for October

Four winners, no losers for the October option cycle. My cautiousness from September translated into only a few small fish coming in for this month. Winners were short puts in GLD, TLT, two for SPY.

The glass half full side is that I didn't sell strangles like I did in August, or go short--either move would have translated into losses. Instead, I took smaller and fewer long positions.

Going forward I have more positions with some dry powder. Gold is due for a correction any time now, but I think it will be contained. Same for stocks, overbought, extended, but any correction has numerous support levels under it.

Bonds are oversold, but that doesn't mean bonds won't continue lower. I may sell bonds (or sell puts on TBT) on rallies as there are now resistance at multiple levels higher. On the TLT chart 102, 104, 106, 108 are all resistance levels, with TLT at 100.5.

Backratio (net long) AAPL
Short puts (long) on BRKB, GDX, GLD, SPY, TLT

Thursday, October 14, 2010

Grant on QE (quantitative easing)

There is a a lot of market chatter about QE (quantitative easing). I suspect a good many novices read my blog. I found a couple of informative Youtube entries on QE. The first is from a year ago and tries to explain in as much plain English as possible (link1).

The second is a Bloomberg interview from about a week ago, with James Grant (link2).

Aggressive use of QE is almost sure to end badly. That said, estimating the time table, or which assets will move up or down and when is more difficult. Second level effects are likely to produce unexpected market moves, unexpected inefficiencies in various markets.

The Bank of Japan has been one of the most aggressive QE players. The conundrum is why the yen continues to appreciate when their government debt levels and monetary policy makes Japan one of the more likely countries to default on their government debt.

Wednesday, October 13, 2010

Buy GDX, SPY (sell puts)

I had technical trouble, so these trades are a few hours after the fact.

Buy SPY via selling Nov 104 puts, SPY@117.9. As the stock market rallies, the puts I am short provide less and less exposure, the delta goes down. I already am short Nov 91 and Nov 95 puts, as well as some Octobers.

Buy GDX via selling Nov 47 puts, GDX@58.5. GLD continues to run higher. I had a notion to short gold yesterday, but there hasn't been even one signficant break in the rally from the summer lows. The chart looks like “elephant tracks,” or big money flowing in. Don't stand in the way of the elephant.

Bonds (TLT) look weak and likely to get weaker. Treasuries are suffering the brunt of the decline. Corporate bonds (BND) and junk (HYG) are holding firm.


Friday, October 08, 2010

Backratio on AAPL

I initiate a backratio on AAPL using Nov 230/240 puts, selling two 230s for every 240 bought, AAPL @292.0. The backratio is a net long position, there is an explosive profit possibility on a measured decline.

The max profit is if AAPL lands on 230 at Nov expiration. Losses pile up if AAPL moves sharply lower and is below 220 in Nov. If AAPL is steady to higher, I pocket the tiny credit.


Buy GDX (sell puts)

Buy GDX via selling Nov 44 puts GDX@56.8. I initiate a small position in GDX to add a sliver to my gold exposure. For 44 to come into play, the entire rally from the summer lows would be given back.


Tuesday, October 05, 2010

Buy SPY (sell puts)

Buy SPY via selling Nov 95 puts, SPY @116.0. I add a bit more exposure.


Boom! Stocks, gold explode higher

Strong rallies this morning in gold and stocks as both move thru minor resistance. I am long both GLD and SPY, but my trading positions remain small. A coffee shop buddy often asks how my stocks are doing, and if I made any money. I often reply, yes, I am making a little, and it never seems to be enough :).

Yesterday, I took a long look at shorting AMZN and selling a put backratio on AAPL (net long position with an explosion on a measured decline).

As I have mentioned before, I am not a spring chicken any more, so my gunslinging trading days are over. Most of my trades tend to be low risk, low reward, high probability. I may still take an occasion shot on a small position, but as with all longshots only a few will tend to come in.

Friday, October 01, 2010

Mental capital and gold $3000

I stumbled around an old trading rules list. This one is on Dacharts, quoting 22 rules from Dennis Gartman circa 2005 (link). There are the standard and familiar rules that most traders have heard, but there is also #3 about mental capital.

Capital comes in two varieties: Mental and that which is in your pocket or account. Of the two types of capital, the mental is the more important and expensive of the two. ...

Readers know that I am a fan of the concept. Sometimes I cut winners or losers because of the mental wear and tear that riding it out might cause. The most familiar manifestation might be the "sleeping point." During volatile markets, if a person can't sleep at night, sell enough or cover enough so that the risk doesn't keep a person up all night.

I can mention gold. It continues to make new highs. I had a conversation with some younger relatives. I mentioned gold continues to be strong, and one of them replied, "I heard gold was a bubble." This kind of talk is a huge positive for long term gold bulls such as myself. When young people that don't know much, are hearing that gold is bubble, it isn't true.

Just as all the bond market bubble talk makes me more bullish on bonds, gold bubble talk makes me more bullish on gold. To be sure, gold is extended and may correct at any time. However, longer term, I stick to my long standing belief (since 2005) that gold is headed for ~$3000 an ounce.

As for allocations, there is no one size fits all. So much depends on age, income, asset base, risk aversion, life situation, investment knowledge and history, that I never argue about allocations to various classes. There are plenty of other sites or articles that talk about allocations. I see it as highly personal because so much financial and psychological detail need to be provided to give an intelligent answer.