Wednesday, May 30, 2012
Gold is once again at an interesting level for a bullish entry at around $149.00 on the GLD. Gold is trading well today considering the thumping that the Euro is taking and the strong inflows into the U.S. dollar. This trading action may be a relaxing of the recent strong USD/GLD inverse relationship (dollar up/ gold down) which means that participants are trading it once again on the basis of some flight to quality (the dollar is arguably overvalued here) and on the expectation of central bank intervention.
The long end of the Treasury maturity curve is rallying today on strong inflows with the TLT up 2.5% at the time of this note. This is also indicative of expectations of some form of Fed action whether here in the US, EU or in coordinated fashion with other central banks around the globe. It is Important to remember that the implosion of Europe does not behoove anyone as such a catastrophe could trigger a major global depression.
Very interesting relationship playing out between the major asset classes today. The strengthening dollar is (has to be) worrisome for the Fed as it does fly in the face of what they are trying to accomplish. You bet that Ben Bernanke is making some behind the scenes calls to the ECB, imploring them to act sooner rather than later. The problem is, as I mentioned before, that the ECB and the US Federal Reserve have different mandates and there are things which our Fed can do that are not within the mandate of the ECB.
The macro trading theme as I mentioned the other day, is Fed On/ Fed Off. If you believe the Fed will stand behind its promise to intervene should conditions call for it, then this is a pretty appealing entry level. If you are on the camp that either the Fed is done or that there needs to be much more economic downfall before we see a central bank intervention, then it’s time to “head for the hills” as the saying goes and load up on your short positions. I fall on the side of the latter. The risk at this level is very clearly defined which certainly doesn’t take away from the fact that being on the wrong side of this trade will be painful.
The broad SPX is again battling its 150 day moving average. After a full day (OHLC) trading day above the 150 DMA, we are again trading below it at the moment and a close above it would certainly be welcomed by those bullish the market.
Today’s action is one of the dullest 20 handle drops I can remember. Volume is nothing to write home about (although it is broad base negative breadth move) and while it is apparent traders are loading up on protection with the cash VIX up nearly 12%, there does not seem to be panic on the part of traders. Volatility has again shifted forward over the past two weeks which makes sense as traders prepare for turbulence over the next couple of months. The chart to the left is from 5/16/2012 and the one to the right is today’s date.
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CJ Mendes
cjm
Trading Options For Income
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