Despite weak unemployment data, stock indexes refuse to move lower.
The fact that weak employment may result in continued stimulus injections from the Fed month-on-month has, in my opinion, provided a backbone of support in the indices and, at the same time, dulled gold and silver’s safe haven appeal.
STOCK BUBBLE
In my view, the Fed is creating a bubble here within the indices, but make no mistake; it’s been the stock indices that have been the investment of choice for most investors for 2013. I only refer to the term bubble here due to the fact that all three indexes are trading near all-time highs while the Fed is injecting $85 billion a month in stimulus. It is my opinion that all three indexes would not be near all-time highs if not for the stimulus efforts of the Fed.
GOLD/STOCK CORRELATION
Regardless, I don’t see gold moving significantly higher if stock indices continue their ascent. In my view, safe haven appeal was a major force for the rally in gold throughout 2010 and 2011. So far in 2013, safe haven appeal has mostly vanished for gold and silver.
CONTRARIAN VIEWS
As the saying goes, nothing goes up or down forever. That is why I am proposing the following trades that might be considered contrarian in nature due to the recent trends in the stock indices and gold. For a conservative long term position in gold, I am looking at buying the August gold 1700 call and selling the August gold 1730 call for a purchase price of three points or in cash value, $300.00.
The risk on the trade is the price paid for the spread, which in this case is $300.00, plus all commissions and fees. I am not looking for an extreme move back above $1700, but rather a rally that could take gold futures back up to 1650 or higher. If this happens well before August option expiration in late July, the spread could be worth more than the price paid. Maximum profit on the gold spread that one could collect is $3,000, if both strikes finish in the money at the time of option expiration, minus all commissions and fees.
E-MINI PLAY
For the stock indices, I am proposing the following trade in the mini S&P’s. I am looking at buying the June E-mini S&P 1500 put and selling the June E-mini S&P 1440 put for a purchase price of seven points or in cash value $350.00. The risk on the trade is the price paid plus commissions and fees. The maximum profit on the trade, if both strikes finish in the money at option expiration is $3,000, minus all commissions and fees. Again, I’m not anticipating a move down to 1450.00 in the mini S&P’s that would wipe out this year’s gains, but rather a four to five percent correction that could take us down to the 1510 level in the mini S&P.
RISK DISCLOSURE: THERE IS A SUBSTANTIAL RISK OF LOSS IN FUTURES AND OPTIONS TRADING. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS. THE USE OF A STOP-LOSS ORDER MAY NOT NECESSARILY LIMIT YOUR LOSS TO THE INTENDED AMOUNT. CURRENT EVENTS, MARKET ANNOUNCEMENTS AND SEASONAL FACTORS ARE TYPICALLY BUILT INTO FUTURES PRICES. A MOVEMENT IN THE CASH MARKET WOULD NOT NECESSARILY MOVE IN TANDEM WITH THE RELATED FUTURES AND OPTIONS CONTRACTS. THIS REPORT IS A SOLICITATION FOR ENTERING A DERIVATIVES TRANSACTION AND ALL TRANSACTIONS INCLUDE A SUBSTANTIAL RISK OF LOSS.
