Building upon previous weeks articles, gold is finally making that long-awaited correction and it may continue for another day on Thursday as margin rates were increased. Gold has been an extreme fear trade the past few weeks while the markets have fallen. As everyone loses faith in the economy, the dollar, and assumes Bernanke will print more money via QE3 (or QE inifinity to some), gold has moved to record highs. Now that logic is finally setting in that while the economy is not good, it is not Armageddon just yet. The fear to the gold bulls that Bernanke may not print QE3 right away is finally starting set-in and causing part of this gold sell-off. In the long-term, I still think gold goes up though. The margin hikes are just icing on the cake. As the money flows out of the fear trade in gold, some of it is bound to end up in other equity market sectors giving bullish support in the short-term. As long as gold continues to fall in the short-term, I find it extremely hard to justify shorting the markets unless it’s a modest hedge for your longs.
Friday is still the big day of events that I will not be gambling on much. I do not believe Bernanke will hint much, if any, at QE3, but I am unsure if GDP will be worse, in-line, or beat the weak expectations. With that being said, I am even more unsure if treasuries will start to be sold and the money flowing back into equity markets by Friday either, but if we do not receive QE3 anytime soon, that is a likely scenario to happen. Durable orders came in stronger-than-expected, so this gives slightly more odds to a GDP beat, but I am still not comfortable with that trade on a high confidence level. We could even receive a sell-the-news reaction for all we know. All these variables are yet again another reason why I hold very high levels of cash in this type of market and stick to mostly index trades, not stocks. Protecting capital is still my utmost concern at the moment before the next bull market begins.
Basically, you can finally color more more bullish mostly because gold is finally selling-off. That was a key indicator I have been watching for and Jim Cramer has been stating often on CNBC, which I am obviously in full agreement with. I still had my short gold position via going long PowerShares DB Gold Short ETN (DGZ) and waited on confirmation this morning that gold was going to continue it’s sell-off before I added to it. It appears Thursday should at least start the morning with a sell-off, but I would not be too aggressive in shorting gold now after the past two days as a bounce can be expected even with the margin hike. I would consider adding some more long-side risk to the table if you have been short lately. I have not added to my ProShares Ultra Russell2000 (UWM) position lately because I had a very sizable position early this week that has paid off nicely. Now I am letting a more modest position ride and will likely reduce a bit more risk before Friday’s events. As Friday unfolds, I will feel more comfortable quickly deploying cash in the direction we move rather than anticipating which direction that may be ahead of time.
I am still planning for more downside, especially after Labor day and the possible increased Middle East tensions with Israel in September, but we can feel more comfortable that the downside risk may be limiting itself and upside potential is finally seeming more reasonable to the masses. We do not want to discount the strong bullish run the past few days and how we are creating an ideal short-setup within this trading range. I just don’t care much for a short-setup when we are so correlated to headline risk with Friday around the corner.
As always, do your own homework to see if you agree. Good luck out there.
Mike
At the time of publication, Kudrna was long DGZ and UWM, but positions may change at any time.
Side Note: If I was much of a long-term investor rather than a short-term trader, I’d be buying up Apple (AAPL) on any of this weakness. Steve Jobs is arguably the most intelligent business man of this generation. If he believes in Tim Cook, keeping in mind that Jobs is still the Chairman of the Board, we should trust his judgement as he definitely earned it. No offense to Cook, but hopefully Jobs health strengthens as I am going to greatly miss watching his presentations.
(AAPL: 376.18 0.00 0.00%, vol: 515,599, avg vol: 19,022,900, 50-day: 374.19, 200-day: 350.67, yield: N/A, cap: 348.8B, short ratio 0.60, 52wk: 235.56 – 404.50, 1yr target: 494.63)
(UWM: 31.87 0.00 0.00%, vol: 0, avg vol: 2,808,560, 50-day: 40.64, 200-day: 45.05, yield: 0.02, cap: N/A, short ratio N/A, 52wk: 24.28 – 52.16, 1yr target: 0.00)
(DGZ: 11.90 0.00 0.00%, vol: 0, avg vol: 165,520, 50-day: 12.67, 200-day: 14.05, yield: N/A, cap: N/A, short ratio N/A, 52wk: 10.82 – 17.55, 1yr target: 0.00)
