Went long Jul and Oct TNA options. This is in anticipation of the summer presidential election year rally, the bulk of which should come in June.
- Tag Archives RUT
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5 Oct 2011
1. Bought Oct iron condor on the RUT 730/740/510/500 @.9. Time risk 15 days. This is a short term iron condor. I anticipate a 2-3 day rise and then another drop, probably the final low of Oct. I will cash the iron condor out when it hits a profitable sweet spot in a few days, probably Monday. Just making a couple hundred bucks, no big trade going on here.
2. Is it just me or now that Ameritrade has taken over thinkorswim, I seem to be paying a hell of a lot more in commissions. I think I may need to switch to Interactive Brokers like I’ve been meaning to do for several years. Problem is I don’t really care to devote 3 weeks to learning their software.
3. I would anticipate Oct lows will be the 2010 lows, which for the RUT would be Apr2010@600 or perhaps Oct2009@550. Note the RUT has already kissed the 2010 lows.
4. The DAX broke support, EWG is back on my shopping list for when we hit Oct lows. One reason for the DAX relative weakness is a strong dollar.
5. I anticipate lows around Oct 12 but this could stretch all the way into Nov. Will need to see capitulation for confirmation.
6. Materials such as AA are relatively weak because of the strong dollar.
7. Gold has switched correlations, it now appears to be an anti-euro. Gold and dollar now appear to be forming a positive correlation.
8. RUT relative strength versus the SPX has been falling.
9. High volume in the last 20 minutes of trading on the 4th suggests institutional buying. Why? They actually think we hit low?
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24 Sept 11
1. Bought some SDS options to cover myself to the downside. Will cash them in with some volatility. In the case of a big market drop of course I will liquidate my stock holdings and recoup losses with the SDS. Most likely however will get shorts and make them into verticals, as I will explain.
2. It’s starting to seem more likely that Greece will default, which will be a relief for everyone, and was actually part of the catalyst toward bullishness on Friday, I think. I would expect a euro rally. I believe this will be the biggest sovereign default in history but I also believe the EU will step in and not allow any critical institutions to fail.
3. I think we may have already bottomed for the year, which was partly why I bought in to stocks when I did on Thurs. I think this because copper is very oversold and likely to bounce, and also because seasonal declines came a bit early this year and so I’d think they may conclude a bit early. Further, McClellan’s eurodollar fractal, which has had robust predictive utility, suggests we are currently at bottom.
4. If we anticipate a stock market rally developing, it follows that the dollar should decline and the euro should rise.
5. COT are net long the euro.
6. I am not a currency trader per se but rather pay attention to currency in so far as it affects my primary plays with the SPX or RUT. Thus I cannot really gauge the extent of any euro move and am not really willing to enter a euro position. The key detail is any rise in the euro should mean a decline for the rollar and thus a rise for the SPX.
7. I expect a fairly robust rally (starting soon) through Jan. I dont think you can really predict further than a quarter with any degree of accuracy so I don’t even try.
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Sept 7 2011
1. The Swiss treasury has been extremely helpful to my FXF puts. I anticipate the flight from francs to continue at least for the next few days, partly because CME raised margins on /6S and is raising them again Thurs and Fri.
2. Need to reassess my profit target with the franc, I’ve made a lot of money already and it’s tempting to cash in. It’s also difficult to say where the franc will stabilize. I’m inclined to think there will be a shift to dollars which will push down FXF further, so my gut feeling is to hold these puts through expiration next week.
3. I bought RYIRX with a mind toward an Oct late Sept bottom. With my sudden profits in FXF I’m less inclined to take risk elsewhere so have contemplated liquidating just so I have less to worry about, furthermore I want to concentrate all my attention on the franc. However the trade was sound and still is so I am maintaining it. If the dollar continues to spike, as I anticipate, this should cause the indexes to decline. At least this was the historical inverse relationship, but this relationship is not so reliable nowadays.
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test #1
Back from sunny Thailand.
RUT/SPX/NDX
1. We seem to have survived test #1 of Aug lows with our capital more or less in tact. It’s not 1929 and I find much of the hysteria in the financial media to be overblown. Buffet for one is buying and insider buying has increased dramatically. Warren Buffet remarked that he has recently done the most buying in a couple years. I am always inclined to follow Buffet’s lead. Also if you read the prognostications from experts like Faber, etc, they are getting fairly universally gloomy. As a contrarian this is my signal to be bullish… though not quite yet… Buffet’s words of wisdom: “Believe in America.”
2. As discussed previously, I anticipate1-2 more tests of this same level, or higher lows, through October most likely.
3. Seasonal patterns suggest a low in Oct. McClellan’s eurodollar fractal supports this. We may have seen lows for the year, however, barring some news event (which is by nature unpredictable).
Gold
1. The chart at the moment (after hours Tues) looks to have topped, from strictly a charting perspective. However gold has had several fake tops only to bounce higher. Don’t try to chase gold, and as long as real rates remain negative, gold will continue to inevitably appreciate.
2. I see a sell-off as somewhat inevitable from a contrarian point of view. Everybody, including all the talking heads on CNBC, say buy gold. This should be a topping signal and a signal to sell. Indeed if I was holding gold right now, I would be waiting for one very high volume sell-off day before I liquidate. This is because more of the sheep are starting to move in and naturally I would be keen to fleece them. However once again gold has had too many fake moves, too risky either way.
3. In place of investing in gold, which is too high risk at the moment, I am looking to acquire cheap blue chips such as AA, XOM, F. Not touching gold with a 10-foot pole. Could crash any day, could continue rising. Who wants uncertainty like that.
BAC
1. I find the hysteria surrounding BAC to be completely overblown. As long as they continue to liquidate non-core assets and generate revenue, they are a sound megga-bank.
2. The financial sector as a whole is in a bit of a hysterical state (eg recent news surrounding GS).
3. I hope BAC has a big tumble, if so I will buy the stock outright rather than options.
4. The financial sector is an incredible long-term value play at the moment.
Swiss Franc
1. The franc’s rise has been halted by the SNB.
2. Bear flag forming.
3. Speculation the SNB wants a peg CHF 1.2/EUR. I have not yet had a chance to read today’s Financial Times, there may be news about this, however this may be talk simply to spook traders, which would probably have the desired effect of a roughly CHF 1.2/EUR valuation.
4. Been holding FXF puts for Sept. My ideal level would be $0.9, my profits would be astronomical then, and this might actually happen if there is sufficient panic, which I think a big leg down could produce. A more conservative profit target would be $1 or $1.1. I will decide how to take profits when I see how the franc behaves. My initial trade plan was to hold through Sept op-ex or $.09 but we’ll see.
Capital Preservation
1. If the Swiss franc and gold and silver (and certainly not platinum or palladium) are not safe vehicles for capital preservation, then how to hold cash?
2. PRPFX (permanent portfolio, though note they are exposed to gold)
3. Canadian dollar? Need to investigate further.
4. Norwegian or Swedish currency holdings eg FXS. Need to investigate further.
5. Australia’s dollar is too exposed to the economic whims of China which I see as risky at the moment. Same goes for Singapore, too exposed to China.
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Market comment Mon 15 Aug 2001
There is a lot of gloom and doom talk on Wall St at the moment, including fears of a double-dip recession. The odds of this were 5% only two weeks ago, and are now according to the Financial Times 30%. So in other words it is still unlikely and these sort of predictions tend to give false reactions because of market movement. The current dip in the market was not unanticipated and fits with general seasonal patterns, and is also quite plausible considering various macro events such as the end of QE, the debt crisis in Europe and the US, etc. In other words, I don’t think financial doomsday is upon us. Of course we must always manage risk so we should take the possibility into account and hedge ourselves, particularly if you don’t believe markets to be entirely efficient; we believe market prices to be a reflection of trader emotion, and emotions are gloomy. This could become self-fulfilling. Nonetheless I believe the talk of doom to be an overreaction which will probably come to a crescendo in Oct, when we can anticipate seasonal lows for the SPX. However, as a hedge, the Company primarily holds cash at the moment.
In the mean time, as we discussed previously, it is advantageous to take the opportunity the VIX presents us to put on spreads.
The Fed, if you read carefully, is starting to conduct reverse repos today. The intention here is to put a floor on rates, which should put some calm into the massive dash we have witnessed away from capital destruction, primarily into gold, cash, and the Swiss franc.
This may also stabilize the dollar. May being the operative word, but we see the possibility primarily because gold is likely to correct in the short term and the Swiss franc should be falling sharply. People need to keep their cash somewhere and the dollar and treasuries remain the most liquid instrument.
The Swiss franc appears to have reversed its parabolic rise. The SNB intervention has been helpful here. There is a seasonal trend for the franc to rise along with gold from Sept-Dec, but I am inclined to think this will not happen this year. The company holds puts on FXF, some of which are already profitable. We anticipate the franc to continue to fall.
The Company holds Aug ZSL calls which we have written off as a loss, though we will attempt to liquidate them at profit if the opportunity miraculously presents itself. This is unlikely but gold may reverse sharply this week, and silver may follow. We do not believe in going into hope mode however, and silver appears to be trading in a channel. We believe silver and gold be be grossly overvalued, however, because real yields are negative, we can anticipate about a 16% appreciation in gold per annum. We are looking for gold to correct, whereupon we will take a long position, probably with vertical spreads to take advantage of the very high current volatility of gold. Silver is a different matter, with lackluster industrial demand and an oversupply; further, industry will use other metals if silver continues to trade high. Silver is extremely difficult to trade however. We made a huge profit last spring in silver’s plunge and are content, and not inclined to trade silver, which we do not see performing in a predictable manner. Silver has become largely a speculative instrument of late (as opposed to being a store of value, as most people perceive it to be). As I said, we have written off our ZSL puts as a loss. We have approximately 100 puts which, if silver falls to ~25, we would have made over $100,000, but it is key to observe that we are value investors, and our total loss in the puts is only $1000. In other words, our risk exposure with silver was always minimal, and this is the only way we trade, particularly with an instrument like silver.
We used to trade Citibank a lot. C was good to us. Now with the reverse split C is no longer cheap, and we like cheap trading, so we have shifted our focus to BAC. Totally pointless transparency statement, BAC is the Company’s bank.
The Company sold May12 7/10 vertical bull put spreads last week in BAC and will likely add to the position if and when we see advantageous short premiums. We do not think BAC is doomed. The Company is, again, interested in value investment, and we see BAC as presenting great value, being almost 50% undervalued. Fair value for BAC is about $12, and this is a pessimistic fair value N.B., and even in a catastrophic worst-case scenario of recession, etc, fair value would be around $10. We do not think BAC will recover share price quickly, however. As we have discussed in a previous post, we can anticipate a seasonal rise in the SPX Nov-May, and the financials should rise with it. Now, given general investor sentiment at the moment, we are slowly building a BAC position; for example, the broad market may drop further. People might start to panic sell BAC. We will be waiting to buy, but we are in no rush, particularly given that the SPX tends to bottom in Oct. Calling a bottom is often a pointless exercise and we are not fully convinced BAC has bottomed, which is why we are slowly legging into our position. However the clamor of doom is suggestive of a bottom, and BAC seems to be holding at current support levels.
Regarding the RUT, we find the recent selloff to be overblown, but then again, we also regard the prior rally as a fake rally induced by Fed liquidity. We are not inclined to trade the RUT at the moment, we believe it will be volatile and unpredictable through Oct. We do however plan on going long at the end of Oct to take advantage of seasonal patterns. This plan may change but that is our general strategy at the moment.
Investor panic and the talk of doom and recession is suggestive of a bottom. The average investor sells at the bottom and buys at the top. As contrarians, we are inclined to think the RUT has just about finished its drop, and we anticipate it moving in a very volatile sideways range through Oct. We will wait at least until mid-Oct however before we even consider taking positions on the RUT. This is unfortunate because our bread and butter is iron condor spreads on the RUT, but again, we are not inclined to trade the RUT currently.
If we actually do see a crash, the Company will move in. We are over 80% cash right now. We are interested in blue chips such as GE, C, F, etc. We will probably maintain our high cash levels as we are somewhat risk averse at the moment.
The Company was begun incremental investment in PRPFX, following permanent portfolio theory. We regard this as a savings account, given that holding the dollar in cash presents little advantage at the moment. Though our high cash ratio shields us from risk, the blunt fact is it is earning no interest and is suffering from the general malaise of the dollar, and the massive capital destruction we have witnessed in recent years. Given our international operations, the capital destruction of dollar held assets and the dollar itself is of great concern. We probably feel this more acutely than investors back home in the States (I type these words in Bangkok at the moment); for example, much to our surprise, our Philippine peso assets are actually growing nicely in value, which we certainly never expected (we maintain Philippines operations).
We like the long term performance of the permanent portfolio fund and the theoretical basis behind risk management in permanent portfolio theory. We would generally be inclined to keep most of our cash here, but permanent portfolios are subject to huge market gyrations, and we would like to see investor sentiment improve a bit (ie we don’t want to hear any more talk of double dips and recession). As things stand we are incrementally building a PRPFX position, and the recent market swoon has been helpful, as long as it doesn’t swoon any further, and in general we don’t think it will to any large degree. Again, it is important to remember that most people buy at the top and sell at the bottom. Permanent portfolio theory has built-in hedging, which is why we like it, but again, it is not immune to large market gyrations. Permanent portfolio theory is a mode of conservative investing diversification for the Company. We would probably build a permanent portfolio with ETFs ourselves, but PRPFX is performing well and we like its asset allocation, so the fund saves us trouble and commissions.
We are interested in taking out spreads on the VIX. Volatility is much easier to predict than market prices. We will discuss this in a later post.
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support & resistance 5 Aug 2011
First, somebody wrote me asking why I only write about metals and the RUT and the Swiss franc. Heh. Well, that’s because I’m a firm believer in staying within your sphere of competence. I don’t have anything to say about oil for example (except its relation with silver and gold…)
Like I said, don’t event try to guess a bottom with the RUT at the moment, wait until after the Fed on the 9th.
Swiss franc… they were really targeting the euro with their intervention NB, but the dollar-denominated FXF (we work in dollars here at the Company) shows a fake move above resistance, which is bearish… it time shows indeed to have been a fake move. The Swiss treasury has promised to continue intervention.
Silver has a lot of support to go through on the weekly chart. Commodities generally crash up (in contrast to stocks) and tend to unwind in a step-by-step manner (the opposite of stocks). Since I’m short silver I’d really like to see a step down at each support level. We could be at 25 at the end of next week and I’ll be the happiest bastard alive in the whole world. That speed of decline seems unlikely but then again when silver falls, it falls hard.
Gold can’t seem to break above resistance…?
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Crash
The drop in the last few days was not entirely unexpected (recall I had bought TZA but then got stopped out on a bounce–oooh, I’m still pissed about that…) but the extent of it is rather surprising. I have, however, been of the opinion that the market was substantially overvalued and that the rally of recent years was a fake rally artificially induced by the Fed. Lesson for the Fed? Don’t touch the market, let, the natural forces work. I was saying this several years ago. Indeed when the first interventions from the Fed started to happen I was ranting and raving on my blog (http://www.teggatz.com/blog —I later moved all financial commentary here). So I’d say here we see natural forces reasserting themselves…?
First, don’t even try to pick a bottom here. Wait.
The drop has gone outside our trading system, leaving us no reference to work with:
With the ichimoku daily, same:
Note it has pierced through the kumo very quickly and easily. Bad sign. Expected a bounce at the chikou, didn’t get it. Bad sign. Turning to the weekly you’ll notice the RUT is just starting to pierce the kumo, which may provide support, need to wait and see:
Looking at support and resistance levels, 730 has been the major flash point of recent times and the RUT has just pierced it. We may see a bit of a bounce here:
However I certainly would not put any money on a bounce. I said before and I’ll say again, the market is likely to be very volatile through the 9th (Fed meeting). This volatility is evidently downward and we should presume it will continue downward until proven otherwise. Trying to pick support for a long at this point is just gambling.
As I predicted, the Swiss treasury intervened, but unfortunately this was to little effect because the market crashed at the same time:
I suppose the key observation here is that SNB intervention prevented the franc from rocketing higher.
I am holding Sept puts and have time to wait. I am confident in this short, and the SNB has said it will continue to intervene. It will bankrupt itself but that’s not my problem. However market forces will push the franc down once this storm has passed.
Silver. The collapse I’ve been waiting for? Perhaps but perhaps not. It may be because the dollar has shot up, and on very high volume too:
Note the dollar has pierced the 50EMA, now we need follow-through. The dollar has pierced the kumo and generally we would expect some difficulty here:
but if the market continues to crash we may see it slice quickly through the kumo. Also note the CCI zero-line cross, though we need follow-through.
The dollar rise was partly because of yen and franc intervention, N.B.
The question with the dollar is, “Is it getting stronger?” Not on the charts, but in a fundamental sense. Something to ponder.
One the weekly chart, the dollar is still in the chop and has the 22 flash point to deal with before we can state in a technical sense that it’s in an uptrend. Also note the dollar is bumping its head right on the downward trendline, so we need follow-through above it before we can start talking bullish:
So back to silver.
The RUT and silver have an 89% correlation and so if the RUT continues to tumble, so should silver:
Note the failed kumo breakout:
On the weekly chart, silver has the key 32 support below it:
On the weekly ichimoku it is quite evident that silver has a long way to fall before it hits the kumo:
A fall to the kumo would be absolutely delightful for me. I’m short Aug silver. However with silver, like with the dollar, we need follow-through before we can be confident in our short position actually paying (op-ex in 14 days). The good thing here is that when silver falls it tends to fall good and hard. And look at PL and PA:
Same with copper. Metals, except for gold, are crashing. Silver being a poor-man’s gold will probably follow the other metals, though with less exuberance (silver is most closely correlated with gold). So anyway hopefully this is the silver crash I’ve been waiting for. However I’m not getting excited until I see real follow-through.
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Notes for 3 Aug 2011
I like to use fractals of past market or sector performance to predict future movement. That’s the way I trade, and it’s worked pretty well for me. Because of this I tend to read McClellan (I subscribe, and no I’m not getting a dime to endorse him, I’m just saying I like his fractal analysis) and also Market Anthropology.
Now, first of all, I bought TZA based largely on one of McClellan’s fractals using the LIBOR, and I discuss that in previous posts. Unfortunately I put a stop on the position. I don’t like trading with stops because here, for example, I got stopped out when I didn’t want to be. I made an 88% profit so am not complaining but with recent action I think it would have been around a 500% profit. No use crying over spilled milk. I placed a stop primarily because I am a professor and I teach one of my classes right at market open. This hour of blind time always makes me nervous.
Now, it seems we are in for a bounce, I think it might be a nice bounce for a few days, in which case I will certainly re-enter TZA. McClellan’s LIBOR fractal suggests a big drop through Oct, and this fits with general seasonal patterns.
I am growing even more confident in my Sept FXF puts and I’ll tell you why. Money is now starting to flow back into bonds. People were parking it in the franc during the US debt ceiling crisis. I think we’re going to start seeing an outflow from the franc. Hopefully this will happen quickly, because there is a seasonal factor working against my position: the franc tends to rise Sept-Dec along with gold. (The franc is almost a proxy for gold.)
Now, a big factor still to be reckoned with is the Fed meeting on the 9th. We pretty much already know what they will say; same as before. However the market is probably going to be very volatile between now and then.
I am still of the opinion that silver and gold are due for a big correction. I’ve been saying this for a long time and will not repeat myself. Often terminal velocity is reached by a macro or political event, and I think the combination of the Greek debt crisis, the US debt ceiling crisis, and the Fed meeting may provide the necessary jolt for terminal velocity (ie, correction). Also, as I said, money is flowing back into bonds. This is a macro event which may influence precious metal prices very strongly. Now, I’m talking specifically here about silver, and I say it’s due for a big correction partly because the fundamentals are not there; neither the industrial demand, nor this supposed shortage of silver. Every reliable source I have read (not a blog) has indicated there is a lackluster industrial demand and an oversupply of silver. Gold is probably a different matter. Though I see it due for a correction, I will probably buy on a good dip, partly because of the seasonal gold pattern; gold tends to rise from Sept through Jan because of the Indian and US and European holiday seasons. However, these things being said, I have to think about my ZSL calls, which expire in 16 days. If I don’t see profitability by the 10th, I will liquidate on the 11th and probably buy Dec puts. Another intangible is whether LaSalle St is interested in futures margins. They were when gold was this high before. But maybe what they were interested in was silver prices, not gold. I have no insight into the thinking of the boys on LaSalle St but we should keep them in mind.
Now, let’s assume there is a broad-market bounce within the next few days. I see this as likely partly because the RUT has pierced major support. However if you’ve looked at your charts you’re no doubt aware that we’ve made a head-and-shoulders pattern, which strongly suggests a big drop in the near future. Again, this is reinforced by McClellan’s fractals and by general seasonal patterns.
I am inclined to follow the seasonal trade and start going long in Oct. I will probably buy triple-weighted ETF options on an index, but I will also be looking for value opportunities on equities. The Company likes value. Almost always our plays, such as shorting the franc, are value plays (I don’t know if it’s cheap to short the franc now, but it was when we made the trade.) So looking ahead, I want if possible to accumulate BAC, C, F, and XOM. This will depend a lot on the value scenario in Oct however.
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