Having not written since Monday, I realize that doing a recap of the whole week is impossible. Why? Because with all of the different things we hear out of Europe, it is hard to remember what happened 20 minutes ago. Wednesday afternoon around 3:30 the rumor re-emerged that the G-20 nations would be providing a 600 billion dollar bailout fund for Europe. About 20 minutes later, we learned that this was a false rumor. And you wonder why volumes are low in equities? Why would anyone try to trade a market like this when a solid fundamental thesis based on "facts" can be derailed by our trusty news anchors reporting falsehoods?
Rather than regurgitate the thousands of news headlines and try to make conclusions (I'm hearing desks with resources and personnel far more robust than me aren't trying either), I'd like to point a few things out that I've seen. First, the divergence in gold and equities for most of the beginning of the week reminded me why I didn't name this blog after an equity index. It is possible to see gold and equities trade differently. The more divergence we see the more long term bullish this should be for gold. Gold bulls are generally not those who believe that the world debt problem will finish in a soft landing. If gold remains correlated with equities, and the world debt bubble bursts painfully, then gold will go down with the equities. As we start to see divergence, we are more likely to see gold re-emerge as the safety play that it once was.
Earlier in the week (Tuesday I believe) I kept hearing about how people were liquidating gold to fund equity trades. Gold did sell off hard only to rebound back above 1750 Thursday morning (before selling off hard again). However, I'm not sure that this thesis had too much in the way of accuracy. With so many investors in cash, selling gold wouldn't be necessary to finance trades. Additionally, there was no tactical reason to go long equities/ short gold (at least none that I heard expressed). And how could there be a pairs (short one long the other) trade when they had been so correlated? I wish I could say there was more of a story to it, but for now, I'm just happy to see that the two are not trading completely in step.
Everyone was sitting on their hands waiting until today's EU summit. Perhaps unprepared for any early negative news, we learned yesterday morning that Draghi (ECB president) was (for now) not encouraging sidestepping rules regarding money printing for the EFSF (bailout fund). I, like many, was a believer that since the ECB legally can't print money and hand it over to the bailout fund, the simple fix would be to hand the money to the IMF who would then hand it to the bailout fund. In the lawless land of Europe, it seemed to me, and apparently a few others, to be the logical 'legal' step. Draghi saying that this was not in the plans spooked the markets a bit. Gold actually got hit harder than the equities, trading from a high around 1760, gold made a low of 1707 (a nice 50 dollar plunge). Gold was trading 1727 and plunged violently to make its first low on Thursday at 1711.7 in just minutes. As has been the case for some time, the down moves in gold tend to be rapid while the up moves are more contained.
In an interview a few years back at B of A, the interviewer asked me to discuss my thoughts on the market/ trade ideas. Without much thought, I responded that I would buy volatility on any major dip. The thesis behind the trade was simply that throughout the financial crisis, we saw that volatility always spiked after a lull. In a headline driven market, one stimulus package or sign of unity among congressmen could put the markets at ease temporarily. But we were always one headline away from panic and massive influx among traders looking to protect themselves with options. As such, We're at a point where the S&P has failed to break the 200 Day Moving Average at 1264. Until we go above, it is safe to be short (a tight stop considering we're settling about 10 handles away). Vol will get bid if the trend of the market is down. For now, we're happy with Europe; trust me, soon we'll be panicked again. And then we'll be calm when they pacify us, before the pattern repeats itself like it has for months already. Buy the dips in volatility. It simply takes too little in this environment to trigger panic to not be long S&P puts.
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