Random Thoughts: Is Gold a Leading Indicator of Equities?
Weighing in on quarter-end, the stock market, and Apple Inc.
The final fifth of our five-session set is upon us and not a moment too soon! This was a long week on Tuesday, much less Friday, and with quarter-end on tap and the holiday stretch ahead, financial folks are looking forward to the requisite respite.
I, for one, think the tape has the potential to be extremely volatile next week (global crosscurrents + thin markets = outsized moves), but we'll cross that bridge when we get to it.
First things first, some top-line thoughts in no particular order:
The Gold Scold is front and center as the yellow metal is all over the map. While I'm not involved and have no plans to be—I don't believe in it—I wouldn't be surprised to see gold rally $100 Friday over Friday.
My focus is on the equity side of the equation; after covering my SPY (NYSEARCA:SPY) short in its entirely (near the low on Monday; better lucky than smart) I have attempted to use price to my advantage in positioning my current risk.
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If you haven’t reviewed the "Danger Zone" we highlighted yesterday, please take the time to do so. This is a very important juncture for the market and you should be aware of the technical road map as most other traders certainly are (and you always want to know what your counterparty is thinking -- if your counterparty is actually human).
I will also draw your attention to the S&P (INDEXSP:.INX) vs. Gold chart below; in a word, WOW.
- If you are short S&P, one approach would be to buy gold as a hedge, setting up the Short SPY-Long Gold pairs trade (dollar neutral) for the 'reversion to the correlation' trade. Not advice -- I can't do that without knowing your time horizon and risk profile -- just thinking out loud.
Apropos of the May 23 scribe, Can the S&P Trade to 1500?—the article that highlighted the Morgan Stanley z-score, which spoke to the nature of the demand, ie short-covering vs. real buying—I got the following "color" from some of my feet on the Street yesterday: "This is NOT real buying; we're seeing shorts scrambling like lemmings.”
I'm extremely conscious of my own cognitive biases, so take that with a grain of salt. If it’s true, however, it would remove a forward level of demand.
Deutsche Bank AG (USA) (NYSE:DB) and Barclays Plc (ADR) (NYSE:BCS)—our overseas banking tells—were heavy all session yesterday, and again this morning. Goldman Sachs (NYSE:GS)—which has underperformed of late, but caught a bid yesterday—remains my primary tell in the space.
Lots of Fed chatter making the round; we'll see if the jawbone is connected to the backbone.
Apple Inc. (NASDAQ:AAPL), trading at $390 as I type, is $30 from the price target we fingered in January.
Anyone can celebrate good trades; it's how you handle bad trades that earn stripes.
- If you haven't see the latest episode of Hoofy & Boo, on behalf of BlackBerry (NASDAQ:BBRY), here it is!
Minyanville reader Ken writes:
He told the University of Texas to take the 1 billion for delivery and there was only 1.7 billion left to deliver of the 80 billion. Why does this story only get told on Gold Bug sites that have little credibility? Your Gold Scold was dead on but I think this also needs some light...no?
There are always two sides to every trade; I have no horse in this race. I made my trades in the yellow metal, left the party too early, and have largely been a spectator since. Kyle Bass is scary smart and I have much respect for him. I also 'see' that gold is up from $300ish in the early '90s, and it hasn't rallied with $10 trillion of liquidity pumped into the system (quite the opposite), so I respect that as well.
We could—indeed should—see a nice snapback rally next week as fund managers take a shot on the extremely oversold metal once the quarter-end purge is over. I'm not there—I think longer-term it works lower still—but it could help shape sentiment, so I'm watching it. All for what it's worth; we certainly don't take pleasure in other people's pain, and I hope this finds you well.
Disclosure: Minyanville Studios, a division of Minyanville Media, has a business relationship with BlackBerry.
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