Category Archives: SPY

That was fun

There we have it.

The S&P in moderate panic mode on news (presumably) that a budget deal is in the works. So good is bad for another Fed fix. It’s been a long time since we saw such a smooth ride down. I like this chart, look where we stopped, surprise.

ES Chart

For those of you looking at Fib extensions we have a bit more downside. (Or not…) What was so fun (and profitable) about today’s trading was the failure to find 1800 again and then the breakout under 1792.

These opportunities are rare these days, it was a beauty.

ES Chart Levels

The VIX screamed higher 10% to 15.42. This in itself isn’t so extreme, but if the end of the week shows some follow through we’re in for some volatility. Finally!

The other possibility is we’re going to find a range here 1775 -1805. That also offers some interesting possibilities.

Good Trading.

Selling Vol on the radar.

Following a $6.7 Million VIX Call Spread

On October 18th Bloomberg published an article (here) about a trader or institution that bought 160,000 February 24 calls and sold February 29 calls (in equal measure).  The open interest today is at 170,000 and the cost for the trader on October 18th was 42 cents per contract or $6.7 Million. I’m following this trade for fun.

It was very likely a hedge against the SPY (or maybe some SPX futures?). Almost 30 days later the pair would trade at about the same price but what’s interesting is to imagine what this trader/institution had on the other side.

Look at the 6 month VIX and SPX chart below.

VIX-SPX-Call Spread

The SPX is up about 50 points since October 18th and the VIX has barely budged from 13. What would the hedge be? Long SPX or short SPX? It’s a call spread so presumably long SPX (remember VIX has a pseudo inverse relationship with the SPX). The hedge will make money as volatility increases and a quick look at the chart above shows strong resistance at 13.

So how many shares of the SPY (or SPX futures) would you own, if you put in place a $6.7 Million hedge? That’s a good question…  But whatever their long position even 30 days later, it looks like a good trade.


Shifting Fed

Now we can explain why bad news is good and good is bad.

This morning the claims numbers missed slightly and the ES is rallying. Personal income rises, and spending falls. Ok. The logic apparently is: if the economy slows or stays flat, The Fed continues buying. A stock market methadone drip. This is now the only factor of any import, left for investors. How much have central bankers primed the system? (source: FT):

  • $12 trillion of financial asset purchases by the big 5 central banks
  • 520 central bank rate cuts
  • $33 trillion of fiscal and monetary stimulus according to the BIS1 (an amount equivalent to (46% of the world economy)
  • The lowest US government bond yields in 220 years
  • 50% (or $20tn) of global government bond market cap trading with a yield below 1%

The effect withdrawl will have on the EMs or Europe, is unclear. And yet I have gold in the back of my mind… Gold remains the outcast, only recently she was the prom queen. What to make of the paper selling in gold?

S&P-Gold Chart

All of last weeks worry was unwarranted. Really? That was quick. Is the VIX buying it? She can’t decide what to wear to the prom and gold is not in fashion.

VIX Chart

So when will QE end, slow, stop or be spun into such schizophrenic confusion that rehab is the only option? Never? I find that hard to believe. When the economy starts working on its own? That’s vague. Maybe they can take it in 12 steps. Friends of Ben.

The risks of shock to the equity euphoria are huge. Being long here feels dicey to me, but based on the charts it looks smart. We met one of my pull-back targets, but I personally traded it poorly. I was expecting more time to pass, end of July was my target time horizon. Here’s the chart and my logic is here.

S&P500 Chart

Leaving aside the BOJ, ECB, and Fed, the most confusing action for me is gold.  Is it not a safe haven investment after-all? Have we been mislead? Where’s the simple reasoning that gold will protect against inflation? Is that no longer a major risk? Check out the gold chart. Ugly.

Gold ChartGood Trading.


Good Morning Viatnam – S&P Retracement Levels

This morning it was ALL Japan – not Viatnam – I admit, but I woke up with Robin Williams ringing in my head.


The Nikkei extended their losses after:


This sent the US and European markets into a tailspin. Expectations were obviously not met. It’s not often you see a gap open in the S&P down 1%. A bit unexpectedly the ES has been working off it’s overnight fear all day. Remember there’s a big buyer stalking…

Considering a slightly longer term, I’ve been looking at some potential cycles that might make good targets. If you’re even slightly bearish this perspective might interest you. If you’re bullish these might make good entry points.

I looked at three of the last major retracements during this bull market on a yearly chart.

  • September-November 2012
  • March – June 2012
  • May – September 2011

I measured the range as a percentage and measured the duration between the high and low. I’ve written about it, here. This is what I come up with:

Retracement Targets

If history rhymes, the medium term levels to keep an eye on:

  • 1558
  • 1515
  • 1400

And if this pullback continues we should be attentive around:

  • July 23rd
  • August 1st
  • October 24th

Even at these targets on the yearly chart, the market will still be trending upward. Count on the bears coming out of the woodwork.

Good Trading

Robin Williams

The Divergences Screaming, Hello?!

Rambling about nothing is better than proclaiming some truth based on limited information.

And as we know, we know very little when it comes to predicting market moves. Just this morning, for example, terrible numbers hit the tape and the S&P continues oozing skyward. Good is Good, Bad is Good, the Fed is Good, indefference is even good. Until it isn’t.

So I thought I’d ramble about a few divergences which have me perplexed.

The first jumped out at me yesterday while the VIX was climbing on momentum WITH the S&P. Technically that happens but it was screaming  “look at me” yesterday. Options in general and puts in particular were getting bid up while the market was climbing. Fear of a rising market?


The second has been obvious all year, but it’s worth thinking about. The Gold Story – some would call it the Apple Story…

If you take the premise that gold is a hedge against inflation, gold isn’t worried, atleast paper gold isn’t. That surprises me, because there’s another argument: easy money from the central bank leads to inflation. This argument seems on firmer footing, every central bank in the world is printing. Yet it’s the divergence which has me looking for a trade.

ES GC Divergence

Here are some other good divergences, credit/macro/vix/10yr, labeled ‘just plain silly‘ from ZH.



Something Is Always Parabolic

Gold's Parabolic Fall

The surprise yesterday was gold. We’re always looking for congruence within the paradigms we’ve learned to believe in. I had heard somewhere gold was a safe haven play. During periods of fear or worry, in theory, we should see gold rise while money moves away from risky assets (like the S&P).

That didn’t happen yesterday.

We’ve been told over and over gold is a safe asset, real money. Those rules are too simplistic and after getting burned a few times we start doubting our basic notions. And the press doesn’t bother with details. If gold is up they’ll say “The Fed” and if gold is down, “Cyprus”. In reality information we never see is what drives these markets. In the case of gold it might be sovereigns buying (or selling), Fed fear, short covering, muppet trading, shenanigans in a dark pool, an Asian holiday, or a sublime combination. Traders scramble for an explanation, they scramble to mount another paradigm, to justify tomorrows trade. I do it, you do it, that’s the game.  The game gets easier though when you accept that you’re basing a decision on incomplete, simplistic, and probably false, information. I can tell you categorically, whatever your model is, it’s wrong. In all cases, even Goldman Sachs, a Central Bank, or a sneaky congressman will eventually find his assumptions, wrong. Continue reading

Hmm ohh, one of those days

There are a few moves which don’t make much sense to me today, but after the run-up we’ve had a -0.5% doesn’t seem that painful.

The first wild swing which jumps out at me, is gold; but its true for silver and commodities in general today. How do I make sense of a 4% drop in gold? Trading was even halted for 10 seconds! One explanation might be that banks holding JGB have capital requirement issues, the recent volatility might be sending sellers to the gold teller. Goldman’s prediction of gold at 1200 didn’t help, but that’s been out there for a few days. Or it might be that Cyprus is coming under pressure to sell gold for it’s bailout, this I doubt is having any impact. $400 million sold into the market slowly couldn’t account for the slide we’ve seen.

Gold and 10 Year Bond Futures

And the 10yr bond futures are climbing, what’s up with that? It’s just rising, hanging out on an upswing. Something looks fishy to me. The VIX is effectively flat. So what’s going on here? JPG players are selling gold to buy the US 10 yr and option players don’t see much downside risk in the S&P? What about the weak sentiment numbers and lousy retail sales numbers? There’s a fair amount of risk out there.

Today is one of those, ‘hmm, ohhh’ days. My only expectation is that we’ll touch the 61.8% fib (1542 – 1592) on the S&P by close, but being one of those days… Who could say? Maybe she’ll ride into the close on the 76% which is where she’s at presently.