Humpty Dumpty?

The Fed 'twists' $400 bil of short-term debt into bonds, while Obama proposes $480 bil of stimulus, the BoE hints at another round of QE, the ECB is ready to reverse its rate hikes, and the IMF is to increase its bailout fund to €2 tril. Can all the King's horses and all the King's men put the Euro and American economies back together again?

Gold finally had a decisive sell-off. Have a look at the spot chart below :



TRADE IDEA There may be an opportunity here to trade gold from the short side. If you think that we've seen the highs for the near to medium term, and if you think that gold will consolidate or retrace to $1,000, as some analysts suggest, then you may wish to sell rallies at resistance levels. This chart tells me that gold may struggle to surpass the 1750-1800 area, so this level may be the place to get in.

You could of course, short the future. You could by the put, but the gold vix is at 35, so vol is too high to buy puts outright. A more prudent trade would be to buy the 1x1 put spread, also know as the put bear spread.  Here, you may buy, let's say  a 1600 put while selling a 1500 put.

I'll have more to say on this if gold rallies. In the meantime, we need to have what every trader needs to have most of all: patience.

So in the meantime, if you have any questions or comments, or if you simply have an idea on how to save the Western economies, then by all means send me an email at lenny@lennyjordan.com

Choke a Horse!

With Moody's downgrade of two French banks, the UK Vickers' report, and a rogue trader costing UBS the equivalent of 3,500 jobs, there's been enough news lately to choke a horse!

But the top story has to be the unwillingness of US lenders to supply dollars to the Eurozone. Therefore the CB's of the US, UK, Switzerland, Japan, and of course, Europe, needed to step in with a promise to open the liquidity floodgates. Stock markets rallied. SOLD!

This news wasn't good enough to push the OEX through the upper end of its range, so the condor referred to last week still looks like a good trade to be in.

The VIX is still at a hefty 30+ and well supported, as it should be. If it breaks the level in the chart below, then we'll know that the market is ready to take a breather. Don't hold your breath.



So all eyes now turn towards this week's FOMC meeting. To print, or not to print, that's the question. And how will the markets react to either outcome? Any comments?

One statistic to keep an eye on is the 10-yr borrowing cost for Italy. Currently it's at 5.59%. The ECB is buying Italy's bonds like there's no tomorrow. If the rate gets to 6%, then the Greek problem will look like a mere dress rehearsal.

14Sep11

An investor has asked if could apply the S&P strategy below to the OEX (S&P 100). Sure, because the technicals of these indexes are so closely linked. If you look at the 2-yr OEX chart below you will see support at 500 and resistance at 550 (+/-). So you might sell the October 550-570 call spread and at the same time sell the October 490-470 put spread. I chose October because I like the time decay characteristics.

This spread is know as the condor, and it's described in my book. Yesterday, with the OEX at 526.25, this spread was trading at 6.50 (calls) + 5.10 (puts) for a credit of 11.60. The fees you get from your broker will, of course, reduce the credit you receive from this spread.

You need to be aware that if at expiration, the market closes above 570 or below 470, then you loose 20 - 11.60 = 8.4. The risk/return of .72/1 is not spectacular, but the risk of the OEX breaking so deeply through its support/resistance levels is not that great, either. Anyway, you're not going to run this spread through expiration. Instead, you're looking to buy it back at 6 or 4, taking a few ticks out of it.You would also put in a stop loss order to pay 13 or 14 to buy it back.

So now you need to be the trader. The technicals are on your side, but what can go wrong with the fundamentals? What if Greece defaults? What if Merkel gets a a vote of no confidence? What if France's banks get downgraded? What if the FOMC decide on another round of QE? What if they say that they've done enough? Has the market discounted the bad news?

At this point, you need to talk to your financial adviser. Let me know how you get on.

blogdate 12Sep11

Hi,

It's getting scary. Last week, Germany's ECB member Jurgen Stark quit, while the Bund reached a record low of 1.77%(!). Obama's jobs plan got a lukewarm reception, and it was basically discounted as electioneering - and not cheap, either. The Swiss stopped their currency appreciation at 1.2 to the Euro. Bernanke added no direction. Trichet blew his top.

Stocks sold off, but could have done worse. Have a look at this 2-yr chart of the S&P 500, courtesy of BigCharts:

We seem to have entered a mini range with support at 1100, resistance at 1250. We'll probably stay in this range until the FOMC meeting, 20-21 Sep. A TRADE IDEA is to look for this range to hold through the meeting. If the meeting results in nothing to break the range, there will be a premium-selling opportunity such as  selling options at technical levels while buying covering options. For example, you might sell the 1050 put and the 1300 call while buying the 1000 put and 1350 call. Please consult your financial advisor before you do this trade.

Meanwhile, market analyst and derivatives guru Satyagit Das, in Friday's Evening Standard, expressed renewed doubts about the European bailout plan, banks exposure to Europe's debts, while citing evidence that the money markets are beginning to again tighten (or freeze) up, while the broader economic environment deteriorates.He said, "If the markets seize up again, this time it will be different. There may not be enough money to bail out everyone and every country that needs rescuing."

Stay tuned.

050911 weekly

Hello Again.

CONSUMER SPENDING, anecdotal evidence: I just received word that my gas bill is to rise by 11%, while my electrical bill is going to rise by 18%! Meanwhile, the price of a pint of beer here in London is firmly at £4 ($6.50!). (Unless you go to one of the Samuel Smith's pubs, where a fresh and tasty bitter still costs only £2+).So what does this say about consumer spending?

CHINA HEADED FOR A CRASH?: A new book, entitled 'The American Phoenix' (Profile Books) by Charles Dumas and Diana Choyleva (Made known to me by Anthony Hilton of the Evening Standard.) posits that the Chinese growth rate is likely to halve because their export-led growth model is unsustainable.

This analysis dovetails into what  Soc-Gen economist Albert Edwards said, as reported in the Guardian on 03Jan11 (yeah, that far back). Here's a few quotes: "... housing and credit bubble goes out of control..."  "The Chinese situation is the one that could come out of nowhere because people are not considering it as a serious possibility."  "...it's a bit like investing in Nasdaq  stocks in 2000..."

We've heard this story before, from Japan in the 90's. We all know how it ended. This time, however, the leverage is far greater.

NFP: Told us what we already knew: the economy is in the doldrums at best. All eyes now look toward the Fed meeting on 20-21 Sep. so what can they do? print more money? Buy puts on equities indexes as we rally. I'll have more to say about his during the week.

STAY TUNED