While it seems sensible to consider the political implications of the results for Europe's future when trading, I would emphasize the importance of the reaction of the Greek people. Over the past few years I have noticed that markets have a tendency to become increasingly volatile when violence in Greece is shown on TV. You won't find fundamental or technical analysts talking about it, but if the elections lead to violence, and that hits our TV screens, it might well accentuate whatever moves we are seeing. If chaos is to really set in, then accelerated bank runs become a near inevitability. If this scenario plays out, markets would likely take a nose dive.
What happens this weekend may have implications for the Fed language that we hear later in the week. As readers will remember, we have been looking ahead to this coming weekend and week for some time now. Many, including Goldman (which has been calling it for months) think that the Fed will announce QE3 this week. If the elections lead to a poor market reaction, the likelihood of QE3 increases significantly. Barring a strong sell off on Monday due to a Greek fallout, I believe that people are over estimating the likelihood QE3. As I have said here before, the Fed has a smaller toolbox than it once did. Unless we see a new yearly low in the stock market (over 60 S&P handles lower), I think they will keep what little they have left in the way of policy stashed away for a rainy day.
Gold has become incredibly difficult to handicap of late. As those who have read my blog before know, I abhor financial journalists' unwillingness to take a stand on the topics they report on. As just mentioned, I will take what I believe to be the unpopular view at this point and say that we will not see QE3 this week. However, I simply can't take a directional view on gold. We have seen swaths of divergence between equities and gold in the last couple weeks, but there has not been any consistency to that divergence. The support we have seen hold in the mid 1500s has shown that there is strong demand for buying the dips. However, trading 100 dollars higher than the recent lows of 1527, there is a lot of room to the downside. If you are buying for your portfolio however, just buy it and forget about it for a while. The money printing going on in the world will not stop, and nor will the deterioration of faith in fiat currency.
Options Commentary
In the options world, we are running front month volatility (expiring in 8 trading days) at 20% (a month further out approximately 21%). While vol was out earlier today, we saw gold volatility get hit hard in the last hour (1 pm eastern now). Implied volatility has been higher than realized vol, but I think that is justified. With a front month break even at just over 20 dollars, you are losing on erosion most days. But bare in mind that we moved 60+ dollars on the Friday we received the bad jobs data. With the events forthcoming, I think it makes sense to remain long vol. The events (Fed announcements/ the elections, which have big implications for the currency markets) tend to make the gold markets move big.
I'm off to Mohegan Sun with some friends to play poker this evening. I hope everyone has a great weekend ahead of what is sure to be an exciting upcoming market week. Please post comments on thoughts you have, questions or ideas about what is going on in the market, or thoughts on what I can do to make the blog better.
All the best,
Ben
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