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Random Thoughts: Is Gold a Leading Indicator of Equities?

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Weighing in on quarter-end, the stock market, and Apple Inc.

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Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

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.
  • Details and particulars-our very best content in Minyanville-can be found on the Buzz & Banter, and you can click here for a free two-week trial. This isn't a shameless plug; it's a window into our world.
  • 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!
And Finally, a Minyanville Mailbag: The Other Side of Gold

Minyanville reader Ken writes:

Please listen to the Kyle Bass video.

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?

Ken,

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.

Todd


R.P.

Twitter: @todd_harrison

Disclosure: Minyanville Studios, a division of Minyanville Media, has a business relationship with BlackBerry.

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Position in SPY.

Todd Harrison is the founder and Chief Executive Officer of Minyanville. Prior to his current role, Mr. Harrison was President and head trader at a $400 million dollar New York-based hedge fund. Todd welcomes your comments and/or feedback at todd@minyanville.com.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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