A happy New Year to all.
Let’s get straight to business.
We’ll start with the golden delicious – what appears to be a bounce in the precious metals that has many people wondering if we’ve seen the bear’s bottom.
We say, no.
But have a look for yourself –
On the bullish side, the chart shows the SPDR Gold Trust (NYSE:GLD), a decent proxy for the metal, moving higher over the last few sessions, and her Relative Strength Index (black circle, at bottom) ascending above its midway waterline.
But beyond that, there’s little on offer that’s positive.
We still have all the moving averages unfurled and trending lower, including the no-nonsense 137 DMA, which has proven itself an indomitable line of resistance for the last twelve months (in red). So even if the move has another five percent upside from here, we believe it will meet with a freight train’s worth of selling when it encounters the 137 DMA.
Moreover, there’s absolutely nothing in the volume figures that would indicate we’ve seen a bottom (in blue). For the last six months we’ve seen declining volumes for GLD, precisely the opposite of what’s expected at a major market turn.
MACD (at bottom, in black) has also yet to confirm RSI’s bump above the waterline, and even with positive price action, would still be a week or more away from surfacing itself.
All of which leads us to believe that, at best, we’re witnessing a minor retracement within a larger move down. If you want to bet on it, you can, but you run a big risk, because it could be sharp and quick and over before you have a chance to close out any position that’s profitable.
But what about gold (GLD) futures…?
That said, many among the smart set are pointing to diminishing speculative volumes in the futures pits as a sign that something genuinely bullish is afoot here. And we believe that’s worth a brief discussion.
First, have a look –
The chart shows unequivocally that the excitement over gold that obtained for the last four years has burned itself off to the point of being all but extinguished – certainly a positive omen for gold speculators, no?
But remember – this chart is net longs less shorts, and does not show overall trading volumes, while GLD, the precious metals vehicle for common louts like us, clearly indicates that a selling frenzy (of even the most modest dimensions) has yet to occur.
So while the bigwigs have apparently reduced their speculative hold on the metal, the average ham and egger is far from following suit.
Our conclusion: don’t buy in just yet.
But How Could it Be!?
We received an intelligent piece of correspondence last week that we’d like to share with you. It pertains to the precious metals and comes from a subscriber who wonders why we believe gold still has room to fall while silver’s bottom is already in.
He wrote –
Are you really saying gold down 25%, and silver going up?
Sometimes we rant.
It’s never too long, usually, and we don’t do it often, so when an occasion like New Year’s affords us an excuse and the spirit of the rant settles upon us, we figure it’s time to take a minute and let loose.
First off, we had a good year. It was a good year because we remained independent. We laid out our own investment hypothesis and stuck with it regardless the noise. We made tactical adjustments along the way if our thinking, or just our timing, proved askew.
And we can’t emphasize that first point strongly enough.
Success is never the product of doing what the other guy’s doing, or just did, or says he’s going to do. It comes from the formation of a clear picture in your own bedraggled, imperfect mind and holding fast to it, even as the winds and the hail and the monsoons buffet and shake your very foundations. Remaining focused on the big picture is essential.
Don’t look there!
That said, there are certainly individuals from whom we’ve a great deal to learn, and still others, whose thinking is so extreme and far from the herd that we always seek them out – even if it means rejecting their position 99 out of 100 times. Fresh thought is a key factor in this business. And it’s not to be found in the mainstream media, financial or otherwise.
It also won’t be found on Kitco.com.
Kitco’s an immensely popular website among the precious metals diehards, and one we often visit to get a taste of the prevailing gold-zeitgeist soup. As contrarians, we’re ever looking for a bland brew at bottoms and an overly salty content at tops.
And how’s it taste presently?
Unfortunately for the bulls, there’s still a goodly measure of sodium floating about the stew at the moment, leading us to believe that our own bearish take on gold is still relevant – and the trend toward $900 is still on.
That’s a rant?!
Just warming up.
The rant begins here, friends, with a critique, as it were, of one of the most asinine ‘analyses’ we’ve seen on the Kitco site in our many years of sipping there.
It comes courtesy of a fellow whose name we daren’t mention, but whose article can be found HERE, for those with the stomach, and a full bottle of choice antiemetic close by.
The lout talks a smooth ruse, but seems to think the market in stocks is about to crash. Moreover, the swindler states that we’re already downbound! He writes –
I can assure you we are not done with the secular bear market in stocks.
Boy genius… Care to tell us how you arrived at that? Or how using a chart of unknown origin, you explain that –
[T]he stock market’s P/E ratio is again at a [sic] historically extended level.
Which he then claims is 26.3, but from where he gathers this so-called information we’re never made privy.…
Let’s start by looking at a trade that netted us a killer profit.
We initiated the venture on October 29th, in a letter called The Government SPY Trade, in which we spoke of an Orwellian pact between big government and the internet’s biggest names, Apple, Microsoft, Google, Twitter, Facebook, et.al.
We proposed the notion that these companies were failsafe bets for investors because they simply had to succeed in order for big government and those with an interest in big government to succeed.
We suggested, also, that Facebook was our favorite of the bunch, and, based on recent outperformance of that stock over the broad market, we extrapolated that investors would continue to buy FB shares with greater alacrity than they would the SPDR S&P 500 ETF Trust (NYSE:SPY).
Our trade, therefore, suggested the purchase of Facebook January (2015) 52.50 CALLs for $8.95 and sale of SPY January (2015) 180 Calls for $9.00, leaving us with a $5 debit per pair initiated.
Twenty pairs opened cost you a measly hundred bucks.
Here’s the way the two have traded since the day we opened our trade –
After winding and grinding this way and that, Facebook has now taken a fat lead in the race against the broad market, and we see that as an opportunity to close the trade (In blue, at top).
We also see the RSI approaching the overbought 80 level and therefore feel it prudent to take our cash while it’s on offer.
It doesn’t mean the trade has hit a wall, or that no more profits might be squeezed from it. Just that we’re satisfied with what’s available and are happy to come back and open a similar position in the future should circumstances warrant.
Here are the numbers –
The FB CALLs are fetching $11.05 and the SPYs are trading for $9.69. That’s a difference of $136, less the five bucks you paid to play, and your profit is a very handsome $131 per pair.
That’s 2620%. It’s not fair. And it took just three weeks.
Anyone else sign on for 20 pairs?
Our best thinking says you cash in now – buy back the SPYs, sell the FB’s, get a bottle of Bourbon and go sit by the fire.
Roll ‘em out!
We’re going to have a look now at a trade that we launched just two weeks ago in a letter called Selling the Farm (and the Bugatti, and the Firstborn, and…). It was a straight sale of PUTs on the same Facebook stock, with staggered strikes and expiries.
When we opened, it looked like this.
We sold –
- 5 FB December 40 PUTs for $0.18 each, for a total credit of $0.90
- 5 FB January 38 PUTs for $0.30 each, for a credit of $1.50
- 3 FB February 36 PUTs for $0.65, for a credit of $1.95
Total premium generated for the move – $435
Our thinking at the time was that even given the middling outlook for the stock, we were safe to sell PUTs below what we believed were very strong support levels.…
If gold stays put for the next few weeks, 2013 will mark the first year in thirteen that this most precious of metals didn’t gain ground.
Hard to believe, but after over two years of bearish action that began in late summer/early fall 2011, we can finally say that gold’s a loser.
And so we will.
Gold, you’re a loser.
But we’re not going overboard with the gold-bashing at this late date, because we firmly believe that all it takes is a few weeks of post-New Years bearish hype and we’ll find ourselves smack dab in the middle of a major gold reversal.
Indeed, the turn of the clock may just do the trick. If the final selloff is not yet underway by then, it could well be triggered by all the roundtables and talking heads commenting on the “Great Fall of Gold in 2013,” a story that’s sure to be popular in the reviews and look-backs at the investment year that was.
Either way, we’re going to prepare ourselves now for a possible washout bottom. We’ll only begin buying, of course, when the slide into the mudbucket has everyone positively laughing about the prospects of gold as anything but a pathetic pecuniary for the most paranoid of preppers.
In the Meantime…
Our targets haven’t changed. We’re sticking with the Fibonacci count we offered in midsummer that puts the bottom at just under $900 an ounce. But note it well – we reserve the right to retreat and reconfigure that position in accordance with a changing investment landscape. As we always say, technical analysis provides only a moving target, and knowing in advance exactly where we’re headed is not possible. Knowing when we’ve arrived there, however, is a far more achievable feat.
For the time being, things are moving in the right (bearish) direction, with the help of gold investors themselves, who’ve pulled nearly $37 billion worth of cash from gold ETFs year-to-date. The SPDR Gold Trust (NYSE:GLD), the granddaddy of them all, has seen outflows every month of 2013, and now manages almost half of what it did exactly a year ago.
Follow along friends. This one will be most interesting.
This week, we begin by closing out a longstanding trade that caused us some trouble after we opened, but his since turned out fine.
On October 15th, we initiated a PUT spread on the United States Natural Gas ETF (NYSE:UNG) and took in a credit of $42 per pair. On expiry we were down $0.50 per option and were also stuck holding the stock.
Thankfully, we recommended you hold on, because UNG shares have positively motored since the November expiry date, climbing nearly 16%(!) to sit at $20.70 today. That’s a full $1.20 above our purchase price, and we’re urging everyone who heeded our advice to close out the trade immediately.
After a short but very dusty road, you’re $120 richer for every board lot sold.
The next trade we’re looking at was initiated two weeks ago in a letter called Call Us Bulls in a China Shop.…
Here’s a rundown of a number of recent initiatives that are either looking very strong or have to be mended before the eggnog starts a ‘rolling.
Line ‘em Up!
On November 12th, in a letter entitled A Weak Back, we sold two DIA December 148 PUTs for $0.63 each, for a total credit of $1.26. We used those same funds to buy a single DIA December 160 CALL for $1.22.
A week later (a week back – har! har! har!), we sold the CALLs for $1.97. And today we’re buying back the PUTs for $0.25 each, making for a total profit on the trade of $1.51 per trio (1.97 – .50 + .04 credit from the original trade). And that’s perfectly rockin’ for no money down!
We’ll move now to our July 23rd initiative from Homebuilder Break on the Horizon, from which we have an open XHB 33 CALL that’s still in play.
Here’s the rub –
Exactly one month ago, after reassessing the trade and seeing the setup remained very constructive, we doubled up on our CALL position, reducing our cost base for the option to just $0.77 per. At the same time, we also wrote a pair of XHB November 29 PUTs against the trade that brought our adjusted cost base for the CALLs down to just $0.61 per CALL.
Those PUTs expired worthless, and we now face the December expiry clean and excited over the prospects of taking a big whack of cash from this venture.
But it doesn’t look like we’re going to make our money easily here. With some downside momentum in the broad market now threatening to carry the homebuilders lower, and with a double top just formed on XHB’s chart (red circles at top), we’re concerned about the chances of an immediate break higher – a condition that we need in order to realize the gains we expect from the trade.
That being the case, we feel compelled to continue selling PUTs against our position – below support, to be sure – in order to reduce or cost base for the CALLs further.
At present the CALLs are worth $0.29 and that’s 32 cents shy of what we need to break even ($0.64 when you consider the pair).
So we’re selling four XHB December 29 PUTs, each going for $0.11, for a total credit of $0.44. And we’re also selling four XHB January 29.50 PUTs for $0.23 each. That pockets us a total of $1.36, enough to cover us handily through the end of the trade.
Next, we move to our October 8th initiative from As a Dog Returns to its Gambit, wherein we made a bullish bet on Facebook at precisely the wrong time.
We sold a credit spread on the October expiry and bought a CALL with the proceeds for the December expiry. Our thinking was that Facebook would decline over the short term and than reascend to hit new highs through year end.…