Markets Going for the Gold
Dear Slingshot Trader Subscribers,
Right now in India, many people of that country are gearing up for Diwali, the festival of lights. The festivities take place beginning on June 17. It’s a big event for millions of people, and gift-giving is a prominent part of the festivities. The favorite gift to receive, perhaps now more than ever, is gold. Usually it is in the form of jewelry, but even so, the sheer numbers of participants in the celebration may have a seasonal effect on gold. Such an effect would only be enhanced if the timing of the festival coincides with a growing global distrust of currencies – which it does.
While the S&P 500 index seems to be putting in a stubborn support above the 1,300 level, Gold has been quietly inching higher. In the past few weeks, the gold-price-tracking ETF (GLD) has actually outperformed the S&P 500. That is to say, even when the markets were falling, GLD wasn’t falling as far, and now that the market is tepidly testing a bullish posture, GLD is actually forging ahead with one. The figure below gives the detail.
GLD / S&P 500 comparison study: Chart Courtesy of MetaStock
This chart shows the price movement of GLD since the beginning of the year. Most of the movement has been downward, but the jagged green line at the top tells an interesting story. This line is a mathematical calculation of the price of the S&P 500 divided by the price of gold. So what that means is that the golden line trends upward, if GLD is outperforming the market index.
With the trend of GLD rising higher, it provides further evidence of what we had written about last week, namely that markets appear to be bracing for the end of the Fed’s “Operation Twist”. Although this evidence suggests that the markets are hedging against possible inflationary effects to come. Whether it means they are anticipating more action by the Fed, or other money-printing behavior by the Eurozone and China, it amounts to the same thing.
Investors may be less worried about losses in stocks than they are worried about lost purchasing power in their money. We believe that this is a temporary imbalance based on expectations without any real evidence. In the past, these divergences have corrected very quickly against gold prices. So it shouldn’t surprise you that we opened a trade on Goldcorp (GG) and that it is still open.
Despite the brief pause in dire headlines for the fate of Spain, it is doubtful that the problems have gone away. Even with no change to the current conditions, Banco Santander (STD) is under some pretty severe risks. But with even a little surprisingly bad news, this stock could fall in a way that will make our open position nicely profitable. One important catalyst for that problem would be a disappointment for more easing.
The market continues to have a bearish bias; however, this week has brought indications of a switch to a more neutral or channeling mode. Option buyers in general do not appear to be increasing the number of put options they are buying. This suggests that market participants are becoming slightly less fearful, but even so, they are likely in a waiting mode ahead of the FOMC meeting announcements next week.
Here are some of the news events that we may trade in the next week or so. We’ll be discussing some of these in tonight’s webinar.
June 14 – Core Consumer Price Index (CPI)
June 14 – Kroger (KR) Earnings Report – Before Market
June 15 – Preliminary UoM Consumer Sentiment
June 19 – Building Permits Report
June 19 – FOMC Meetings
June 20 – FOMC Statement, Economic Projections, and Press Conference
When it’s time to open or close a trade, we’ll send you alerts via e-mail. You also can sign up to receive text messages regarding our trades. For more info about ourSlingShot Traderportfolio, you can read trade alerts here and view our portfolios here.
These are the SlingShot Trader positions we opened during the past two weeks of trading that we have not yet closed.
Goldcorp Inc. (GG) – On May 29 we recommended you to “buy to open” the July 37 puts for $2.39 or less. We still like this trade but are not recommending it for new entries at this point. If the price of the stock comes down a little further we will likely renew our recommendation and send out an alert.
Kroger (KR) – On June 8 we recommended you to “buy to open” the July 21 puts for $0.55 or less. We still like this trade and recommend entries at our maximum price or less.
Banco Santander (STD) – On June 11 we recommended you to “buy to open” the July 6 puts for $0.60 or less. We still like this trade and recommend entries at our maximum price or less.
These are the SlingShot Trader positions we closed during the past week of trading.
ManpowerGroup (MAN) – On June 5 we recommended you to “sell to close” the July 35 puts. We closed the position for $2.50 per share for a gain of 9%.
Men’s Wearhouse (MW) – On June 7 we recommended you to “sell to close” the July 34 puts. We closed the position for $4.80 per share for a gain of 113%.
CurrencyShares Japanese Yen Trust (FXY) – On June 7 we recommended you to “sell to close” the July 125 puts. We closed the position for $2.46 per share for a gain of 35%.
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John Jagerson and Wade Hansen