Market Meltdown? Maybe. Gold? – Probable. (GLD, MBI, VIX)

Ladies and gentlemen, back on the 27th of February we penned a piece on the notoriously volatile bond insurer MBIA Inc. (NYSE:MBI), in which we argued that the company would be THE place to park your cash for the immediate future. The article was called The Coming MBIA Bubble, and there we wrote –  

[T]he price of ensuring corporate bonds is now at its lowest level since the Lehman crisis, and with it, MBIA’s business is exposed to less risk… And the same trend is evident in sovereign default risk profiles…. All of which is why we would tend toward aggressive bullish betting on MBIA’s prospects for both the near- and intermediate-term.

And what happened?

Within a week, shares of the stock had shot up 15%, CALL options were up by the hundreds of percent and we began backpedaling like Dirty Johnson at the 1964 Rodeo Clown Championships.


That’s when we wrote The Fortunes of Two Space Age Rocket Stocks: TSLA and MBIA and suggested that you exit your long MBIA trade ASAP.

Here’s the way the whole jumble appeared on the charts –


The question for all you investment jocks out there, is how do we play MBIA now?

And the simple answer is – again, go long.


Because it’s time.

The Technicals are Encouraging

According to the chart, MBI shares obviously got ahead of themselves in February and early March and promptly pulled back 23%, precisely as we said they would. The move took only six weeks to transpire, and the stock is currently resting on support at the 137 day moving average (in blue).

RSI and MACD (in black) now look to be starting their turn, though it’s still far too early to rely on these indicators at this stage.

All the same, if we had to bet, we’d say that current support will hold – and if not, investors can rely on the long term, 411 day moving average (in yellow) to supply a reliable bottom.

The longest dated slightly out-of-the-money CALLS you can find are the best way to play this.

The Squished Head Indicator

Moving on.

A number of years ago, we noticed that the VIX became very compressed directly before the market tumbled. It happened enough times that we came to develop an indicator that we called ‘volatility compression’. Taken together with a number of other measures of internal market activity, we found that ‘volatility compression’ offered a reasonably reliable marker for potential market turning points.


[No! That’s not the picture we wanted.]

We raise the issue today because the last two days’ trade has seen some fairly deep compression on the VIX.

Take a look at the chart –  


These aren’t the lowest readings we’ve encountered since we began monitoring VIX compression, by far.  But at .42 on 22 April and .56 on 23 April, they are getting close.  Should the high/low and open/close readings begin to widen from here, we’ll know that the danger has passed.  Should they contract further, we’ll ready ourselves with some slightly out-of-the-money PUTs as insurance.

More details as they develop.

Wrap it up, Hap!

We’re going to close today with a look at our favorite hate-investment of them all – gold.

That is to say, it’s still not likely the time to go long.


Have a look at the chart.

This is the SPDR Gold Trust ETF (NYSE:GLD), our preferred measure of gold’s daily movements, and a solidly reliable one at that.


According to our read of the charts, this sucker is hanging by a thread.

First up, price action is below all the moving averages and those MA’s are all trending lower (red circle).

Bad enough.

Second, price itself is just one day away from separating entirely from the 137 day moving average, a move that will prove very costly for the gold buggers if it does occur.  Why? Because a wave of technical selling will then commence that will most likely push the stock immediately toward its prior lows at $114.

Why? Because a wave of technical selling will then commence that will most likely push the stock immediately toward its prior lows at $114.

Both RSI and MACD have been bearish for three weeks, ever since the latter confirmed by going sub-waterline at the beginning of April (black boxes).

We note, too, that silver, as represented by the iShares Silver Trust ETF (NYSE:SLV) has a chart that’s far inferior to that of gold and if history is any guide, means we’re in for a sizable downside move for the yellow metal, which has been playing ‘catch-up’ with cousin silver for the last three and a half years.

Hang on to your zippers!

Many happy returns,

Matt McAbby
Senior Analyst
Normandy Research

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