The markets are experiencing a bit of a thaw today, with the memory of panic several weeks behind us now. The VIX has just broken decisively below 40 for the first time since September. Treasury yields have broken out just a tad from their extreme lows. Oil has jumped back to the mid-40s, copper has relieved its oversold condition, the GDX gold stock ETF has more than doubled, and the Dow has crept back to near 9000 again.
The question now remains, how will fear return? In several more weeks or months after the mood turns from relief to greed (and fear of missing out), or in the very near future?
My mind is not made up, but any breakaway rally is way overdue. With every week since the November 21 lows, we have been relieving the oversold condition as a function of time rather than price. That is not to say that the Dow couldn’t creep all the way to 10,000 by March, but the longer we hover here, the less necessary such a rally becomes.
What would be interesting in a January plunge is for the bond market to sell off with the stock market for the first time in recent events. But if the inverse correlation still holds, the overbought condition in Treasuries could find relief in a “happy days are not quite here again but will be soon” rally in stocks. Today’s action is what such an environment would look like, but with a great deal more animal spirits — $65 oil might even materialize (before new lows of course).
At any event, with the VIX below 38 I picked up a few more cheap puts on GDX today. Gold stocks have had a great run, and the same people are buying them today as were holding them in the crash, and for the same reasons. That is a bad sign.
My favorite short though is still the death-defying Home Depot. Also keep an eye on WalMart. People need cheap stuff, but they don’t need as much of it as they have been buying in recent years. At 16.5, the PE on that behemoth is still out of line, as is Costco’s at 18.5.
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PS — Note that in this kind of analysis, I don’t pay much attention to news pieces or economic releases. That is not the way to trade. For instance, we have horrible manufacturing data out today, and all data is worse than 6 weeks ago, but the mood is hopeful and stocks are up, so how can you make money trading on the news?
I look at the mood of the market itself and try to figure out what it is feeling and what themes it is trading on: greed, panic, relief, inflation, deflation, dollar bad, dollar good, etc. I try to figure out the mood by what different asset prices are doing, and wait for entry and exit points when trends look exhaused. To know the larger trend is key, in this case deflation and depression, but the market’s take on the situation is always changing. You wait for Mr. Market to be very wrong about a situation or just too enthusiastic, as in the case of the overextended bond rally this month — in deflation, bonds are good, but overbought is overbought.
So what kind of puts are you buying here? Long-term OOM LEAPs? How much downside are you looking for? Stock prices cut 75%, or Armageddon-style near complete collapse of their share prices?
I netted some coin on some GDX calls thanks to Marc Faber. I agree it’s time to go short again. Great opportunity to liquidate my stupid Perth Mint Certificate at a healthy profit too.
You mention SPG in your current positions. Mind if I ask which date and strike price you’re using there.
All those nice, super-cheap 20 c PUTS with a 2.50 strike seem to have dried up! If only we could recruit some more penny harvesters to steamroll
I have 2010 50 strike puts on SPG. Bought them back in August or September, when the REITs were way up there. Haven’t sold any.
Do you subscribe to either of Faber’s publications?
I prefer very long term puts, but I’m not buying much here since the premiums are still so high and I already have a ton of them from before the crash. I took the unusual step of buying Jan 09 93 puts on DIA yesterday though — there was almost no volatility premium in them, and I think we are short-term overbought. Will probably exit on Monday no matter what.
The GDX puts are 28 and 32 March 09.
Well, I wasn’t subscribing to the Gloom, Boom, & Doom Report back in the summer when I bailed on my commodity positions, but I was looking for Faber’s interviews any time he popped up on Bloomberg or CNBC. I do subscribe now, though, if for no other reason than to pay him my appreciation for his good advice. He saved me far more than the $200 annual subscription fee.
Like you I am looking for opportunities to get into long-term puts, but I’m deathly afraid that I will wait too long for premiums to come down.
In that kind of situation, you can dynamically scale into positions. That is, if I had no shorts at the moment, maybe I would buy $1 of puts now, $2 at Dow 9300, $3 at 9600, and $4 at 10,000, or something like that.