Gold Slowing (SPY, GLD)

There are a few broad market developments now in play that give us little comfort.

The first is the sharp rise in bullishness on both Wall and Main Streets.

The second is a certain giddiness on the so-called political ‘right’ over their election win last week, a development that could properly be read as ‘overbought’ when translated into market terms.

In short, we feel we’re losing something of the fear and dread that are so essential to the underpinning of any market advance.

voyage
On the other hand, we also recognize that we’re uncharted waters here, and that today’s bullishness could grow in size and substance for a while yet.

Indeed, until 1) the unprecedented liquidity available to the system dries up, or 2) a general loss of faith in the currency ensues, we could verily see people going mad-happy.

Truly?

 

Neither of those two developments appears to be crouching at the doorstep yet, and failing some kind of unexpected systemic shock, we don’t imagine either will occur in the next, say, several months, either. But beyond that time frame we’ve little confidence in our own forecasting ability, so we’re going to simply continue monitoring the numbers and provide all the latest, pertinent information to our readership as soon as it passes through our grubby hands.

And hope for the best.

Here’s the first of the finger-smudged evidence –

stoked

This is a chart of the American Association of Individual Investors (AAII) weekly bullish percentage numbers, a reasonable gauge of where Main Street is situated vis-à-vis their stock holdings.

And as you can see, the latest 52.69 read puts us at the highest level for the year. In fact, it’s the sixth highest read of the entire five and a half year bull market.

And we never like to see that kind of enthusiasm.

On the flip-side, here’s a chart of the AAII bearish sentiment numbers. And here we see a potentially greater cause for concern –

bearish

Bearish sentiment is at its absolute lowest level for the entire bull market! At 15.05, there has been no read less bearish than today’s.

How to treat it?

 

It’s hard to imagine that Main Street has had its fill of stock buying and is ‘all in’ on the market. In fact, it would surprise us greatly if that were the case. There’s still way too much cash tied up in GICs and term deposits to even begin thinking about a market top. It’s rather more likely that we’ll see much higher bullish levels down the road than we’re accustomed to, and perhaps an utter lack of bears before this is all over.

And speaking of bullishness, here is the Investors Intelligence Survey, a poll of newsletter writers like ourselves, which just last week posted its biggest jump in the number of advisories turning bullish.

Look here –

biggestchange

The data here goes back 25 years and, taken together with the AAII numbers above, paints a picture of significant optimism from both the pros and the amateurs, and one that doesn’t portend well, in our view, if it continues apace.

So what do we do?

 

At this stage, we’re not advising anything drastic, to be sure. We still see a great deal of bullishness ahead, but we also understand that everyone else is examining the same data as we are, so we have to contemplate that there may be a growing contrarian nervousness developing as result of the current bout of glee – and that we could see some selling over the short term as a result.

And it’s precisely for that reason we’re recommending you close out a trade that we initiated a month ago.

It’s from a letter called Gimme Shelter (October 6th), in which we urged you to buy deep-in-the-money CALLs on the S&P 500 (SPY) and suggested you dedicate as much as 20% of your portfolio to the trade.

And the numbers look like this –

You bought the SPY December 2016 100 CALL for $96.72.

Today, it’s trading for $102.89.

That’s a gain of $6.17 or roughly 6.4% in a month (77% annualized). And that ain’t whistling Dixie, friend.

It’s not our biggest haul of the year, but it’s also not a loss. For those who wish to hold on, you’re on your own. We’ll reinstate the trade on any pullback, to be sure, or at any other opportunity that we deem appropriate.

darth

Commodity Weakness Abounds

 

We’re quick here to pounce on gold, but the truth is the entire commodity complex has been in a free-fall of late.

The chart below of the Thomson Reuters Continuous Commodity Index shows that long-term support was broken well over a month ago and that commodity prices in general are trending at levels last seen over four years ago.

back2010

Technically, the breakdown in support is bad news for all the commodities going forward, and certainly the precious metals and oil have been leading the pack of late with some very pronounced declines.

As to the precious metals, about which we wrote at length last week, we think it’s time today to offer you a trade.

And it goes like this…

 

Gold has been trading in a wild, reckless fashion for the last two weeks, but we don’t believe it will continue.

Take a look here –

Argh[Oops. How’d that get in there?]

Try here –

gld1110
A calm will likely begin to settle over the metals at this stage, before the market resumes lower. All the gaps (seen in the enlarged red box) will have to be filled, and the oversold RSI print will have to work itself higher.

Which means we’ll probably be range-bound for the short term.

We’re going to attempt to capitalize on that by selling some premium and buying some more.

It goes like this –

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Wall Street Elite recommends you consider the following two actions – 1) closing your long DIM SPY CALL as detailed above, and 2) selling five (5) GLD December 122 CALLs for $0.48 each, for a total credit of $2.40, and buying one GLD January 106 PUT for $1.43. Total credit on the trade is $0.97 per round traded.[/mepr-rule]

[mepr-rule id=”988″ ifallowed=”show” description=”executive_lounge_members_only”]

Wall Street Elite recommends you consider the following two actions – 1) closing your long DIM SPY CALL as detailed above, and 2) selling five (5) GLD December 122 CALLs for $0.48 each, for a total credit of $2.40, and buying one GLD January 106 PUT for $1.43. Total credit on the trade is $0.97 per round traded.[/mepr-rule]

With kind regards,

Hugh L. O’Haynew, Senior Analyst, Normandy Research

See what people are saying...

  1. Jesper Markenstam

    Please could you list the specific GLD option contract – there are 3 it seems, ending Dec WK4, Ending Q4, and ending Dec 14. I appreciate I ought to go out and research the contracts available, and I will at some point to be sure. But for the record, please may we have unambiguous details for the contracts you suggest?

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