Investment Philosophy Explained (UUP, GLD)

Dollar (UUP) Headaches? Gold (GLD) Fever?  

There are two approaches to dealing with the flu.

Some folks load up on the Tylenol and attempt to weather the worst of the symptoms by dulling their effect on the body. Nausea? Stuffed up ears, nose and throat? Can’t feel ‘em. Let’s get to work.

The other approach is to leave the malady run its course without taking medication. For those who deal in this manner, the thinking is equally simple. As they claim – at least they know if they’re sick or not, and if it’s worth their while to jump back into the fray.

Finance Mirrors Life

So it is with life in general, and certainly with that slice of life that we specialize in – the investment markets.

Some folks are happier to see the financial medicine rendered on a regular basis when the economy looks sickly – the QE, the fiscal interventions, the coercive interest rate settings. Do whatever it takes, they say, to keep the damn thing rolling.

We call these folks ‘Keynesians’.

The others are called ‘Austrians’ or the ‘Austrian School’ after the writings of Ludwig von Mises, an Austrian economist of a century ago, and their outlook is more ‘laissez-faire’. Leave it alone, they say. Capitalism is a recurring cycle of booms and busts that eliminate the weak hands from the game in a perfectly efficient manner and thereby keep investment capital honest and moving toward the best and brightest.

Austrian Economics

And that’s what makes a market.

Playing the UUP Money Game – Properly

But what about we investors? How should we approach the question of economic theory and the role of government in markets and elsewhere.

The truth is, for those whose interest is purely about making money, economic makes very little difference.

We have to understand the rules of the game and who’s in control – that’s for sure. But beyond that, our role is to simply play the system as it is. Insofar as we can do that, we are neither Keynesians nor Austrians. We are realists.

So we don’t cry if someone somewhere is rigging the markets to go up. We simply go long the market. And we don’t whine because there are dark forces somewhere colluding to sell the precious metals. We just short them.

In our role as investors, we are neutral the nonsense and the philosophy.

As citizens or husbands or PTA members or voters, of course, it’s different.  We can afford to hold opinions. Our opinions can be strong ones, and we can rally and promote them far and wide.

But as investors, we’re going to play the system as it stands.  Be water, my friend.

Environmental investing’, ‘ethical investing’, ‘moral investing’ (whatever ideology you want to attach to it) are simply not methods of investing. They’re means of limiting returns, at best… Or outright losing money, at worst.

Ethical Investing

We all deserve better.  But we’re students of how the world DOES work, not how it SHOULD work.

And to that end, we’d like you to take a look at the following trade idea for the weeks and months ahead.

UUP Giddy – GLD Shoddy

We saw some extraordinary action in the currency market yesterday, as the U.S. Dollar Index plummeted some 2%. It’s the greenback’s biggest one day swoon since the bottom of the Lehman crash six years ago.

Look here –

UUP

This is the PowerShares Deutsche Bank U.S. Dollar Index Bullish Fund (NYSE:UUP), an ETF that mirrors the action of the Dollar Index, whose shares got wham-doggied yesterday (red circle) on big volume (in blue).

We never like to draw conclusions from a single day’s action. But we’re rather relieved to see the pullback. And we’re happy, too, that the RSI indicator is approaching its waterline (black square).

After two bursts above the overbought 80 level in the last two months (in green) it was apparent that something had to give.

And so it did yesterday.

…but that won’t continue.

We’ll very likely see some range bound activity until the overbought condition is thoroughly worked off, and it could accompanied by some volatility – sharp stabs higher and lower that give the impression of a dollar top.

But nothing could be further from the truth.

Reality is that the dollar still has a ways to travel. It’s taking a breather here, but should be at new highs in the next four to six weeks.

In the meantime, all manner of hijinx and clowning will take place in gold bug hideouts across the land, where the fever will again be on (without any medication taken, unfortunately, in this case).

We’ll see mixed to higher action for the SPDR Gold Trust ETF (NYSE:GLD) during that time, but it will all be a setup for another pullback.

Here’s GLD –

GLD

Yesterday’s pop (in red) could be the start of something new. But we believe there’s little chance of GLD retaking the 117 level (black line). That was the last retracement high.

It’s also the current location of the descending 137 day moving average, a line that has a good bit of predictive power and should not be trifled with.

We have a gap to be filled between 113 and 115, but once that’s accomplished look for the selling to continue.

If we had our druthers, we’d sell GLD 117 CALLs today.

Or spreads with the 117 shorted.

Many happy returns,

Matt McAbby, Normandy Free Stock and Options Research

Share your thoughts...

We encourage people to join in on the discussion. Please keep in mind however, that all comments are moderated according to our comment policy, and all links are nofollow. Let's keep the conversation professional and meaningful.