Black Gold and Gold

Pretty bold call here in Gold from some Cramer guy over at Real Money.

The selloff in gold has not only run its course — if you bought the stocks on the way down, you are up, and up nicely.

…….I think gold’s in a bull market. That there’s more climbing ahead. That this was the pause that refreshes.

I feel very alone.

Except for the buyers of all the gold stocks who are taking shares with abandon.

Yes, value added as always. Calling a bottom 10% after the fact. If/when the call ever goes bad, some new wrinkle will get throw in to allow one to say “yes, that would have been the bottom had the bad news not happened.”

And yes, no one else has gold.

Whatever, we are never here to talk about the past, except when we are talking about the past.

An interesting trade I have seen bandied about involves some sort of long in metals and short oil. I ran a PnF of GLD vs. USO below (twice I guess, not sure how to delete one of them) , and fwiw, it’s in “X”‘s now off a pretty steep repricing.

No options yet in GLD, so it would involve either a straight ETF play there, or actual futures options (I don’t have access to those).

Kind of interesting situation here in Mastercard (MA). You have cascading volatility, which makes modest sense in that the “news” is out already in the form of earnings.

Great stat of the baseball weekend? Blue Jays backup catcher Rod Barajas hit 2 homers and knocked in 7 vs. the Phillies this weekend. In a 122 At Bat season as a backup catcher for the Phils last year he totaled 4 homers and 10 RBI’s.

OK, it’s a great baseball stat for me as Barajas is my backup AL catcher, it’s like an OTM call you forgot about coming into play.

So yes, truly nothing more interesting than hearing about someone else’s Fantasy team. With the possible exceptions of your great par on the 8th hole or that Hold ‘Em hand where someone had a lucky pull on the River. How about an interesting market stat off Minyanville yesterday from Jason Goepfert of Sentimentrader?

I checked for any time the S&P 500 rallied 2.5% or more during opex week, then followed through with a +0.5% or larger gain on Monday.

There were seven occurrences since 1993, and the following day the S&P closed lower all seven times by an average of -0.5%. The average maximum gain was only +0.15% compared to an average maximum risk of -0.91%, so there was a clear negative bias.

We had a similar setup last expiration if memory serves me correctly. Of course thanks to the late day selloff, this one became non-operational.

Jason Roney, also on Minyanville, added some more numbers to it that still apply though.

The SP futures recorded 6 consecutive higher opens and tomorrow (today now) is the Tuesday after expiration. There were just four prior occurences and each time the SP futures opened higher but reversed to close lower by an average -1.18%.

The SP Futures gained more than 2% during expiration week then posted a higher close on the Monday after expiration week. There were 29 occurences (the most recent April 2008) and the SP finished lower 82.75% of the time on Tuesday and closed below the open 75.86% of the time.

I like stats I can understand and hopefully explain, and this is one of them. A one-directional move on Expiration week forces option shorts to chase. In this case chase up as seemingly rip up calls closed in the money. That effect can and does continue through Monday as some are willing to delay covering. But by Tuesday that effect starts to peter out.

It appears to have run it’s course a bit early this go around. But whatever, all these numbers suggest more selling straight ahead.

Calendar’s have “boomed” in the sense that I see pretty decent volatility spreads in any spot without news pending. In other words, outer month volatility maintains a nice premium to the June’s.

There is probably less here than meets the eye though. Or rather, it’s almost a perfect storm of factors that set this up.

June is a 5-week cycle. The first week of an expiration cycle is almost always bad for volatility under *normal* 4 week cycles, extra bad on 5-week cycles. Why? Everyone and their rep seems to roll buy rights the week of and the week after expiration and put pressure on calls, and hence the whole board.

On top of that we have little news flow this week, and a long holiday weekend on tap. In an already slow market.

So why the premium in outer month’s?

Well, it is mostly just the Junes getting crushed like the Yankee pitching staff this weekend. Outer month options continue to expect some sort of *mean reversion* up in volatility. They do not act particularly well, just less awful.

So what’s the opportunity here?

Not a whole lot imho. I don’t feel like June is a buy per se, it is basically just priced as if not much will happen between now and next Tuesday. Which seems like a reasonable assumption. If you want to roll the dice, it’s a cheap *fade* to buy some June paper and cross your fingers for some market action. Just not a fade that interests me.

So as I mentioned the other day that oversold volatility (bearish) was not as good a market signal as overbought (bullish). As per Rob at Quantifiable Edges, it is even worse than I thought.

Over the last 10 years, owning the S&P 500 when the VIX was more than 10% below its 10-day moving average was significantly more profitable on average than owning it when it wasn’t. Let me repeat that. Owning the S&P 500 when the VIX was more than 10% below its 10-day moving average was significantly more profitable on average than owning it when it wasn’t. To illustrate I ran a study:

Short the VIX on a cross of the lower 10% envelope of the 10-day moving average. Cover when it moved back above this envelope. From 5/98 until now there were 87 such trades. The average lasted just over 3 days. The S&P actually GAINED 91.09 points in the 272 days that this was in effect. That is an average of about 0.33 points per day. In the other 2,379 days the market only managed to gain 184.22 points – about 0.08 points per day. In other words, the market actually performed over 4 times BETTER when the VIX was stretched more than 10% below its 10-day moving average. Also, when this VIX-stretch was active the S&P made nearly 1/3 of its total gains in only 9% of the time.

Well that I would not expect. But to me the best way to look at an extended VIX is backwards. That is instead of using it as some sort of action signal, watch and see how the market reacts to the extended VIX. In bear trends for example, the rallies tend to peter out as the VIX gets oversold. In hindsight, a good clue that the intermediate trend was up was when the market did not sell off on an oversold VIX.

But if you are looking for better market signals, Rob does have some criteria.

So is the whole low VIX = complacency thing a fallacy? Not completely. Many times it will lead to a selloff. Here’s a system which demonstrates that. Again, last 10-years is the time period. 1) Short the S&P 500 when the VIX crosses from below to above the lower 10% envelope but remains below its 10-day moving average on a closing basis. 2) Exit the trade when the VIX closes above its 10-day moving average. Here you would have had 58 trades. The average trade would have made you about 7 S&P points and the total system gain, or S&P points lost, over the time period is 403.17 – a very substantial number.

To sum up – just because the VIX is “low” doesn’t mean the market is about to fall. In fact a good portion (about 1/3) of the S&P gains over the last 10 years have come under these conditions. When the VIX moves out of complacent territory and back towards its mean, then the market is susceptible to a decline.

Well, earnings season winding down a bit, but still a few interesting names to watch for. This, from Briefing.

Some names that jump out that have high implied volatility vs historical volatility (suggesting elevated expected stock movement) are CNTF, NCTY, PWRD, CSUN and SOLF… We’d note that these expectations are subject to change in the days leading up to the actual earnings release. additionally, there may be factors other than earnings driving volatility levels

I love this one here, Solarfun Powe Holdings (SOLF). No focus group could ever create a better name for a high octane momo stock than “Solarfun”. Chines AND Solar, what could go wrong?

Volatility has made lower highs, but not unusual when the earlier highs are in the 160’s. And all individual stock volatility trends down over time.

All things considered, options look way pricier heading into this number than at other times in SOLF’s brief history.

…..Adding, this also from Briefing, fwiw.

We’re seeing heavy buying in the XMSR June 11-12 strangle today, suggesting expectations for greater near-term volatility in the stock as the co awaits a decision from the FCC on its merger with SIRI… A total of 8390 Jun 11 puts have traded today vs. open interest of 1220, and 9597 Jun 12 calls have traded vs. open interest of 1520. The straddle is currently offered at 1.30 with the stock trading at 11.82. This means if bought outright and held until expiration, a straddle buyer would profit with XMSR above 13.30 or below 9.70 at June expiration (6/20). In the meantime, a straddle owner will benefit from increases in volatility levels, which drives options prices higher (all else equal)… XMSR is currently involved in the regulatory process of its pending merger with SIRI. The Dept. of Justice approved the transaction on Mar 24, but FCC approval still pending. Dow Jones reported on May 1 that the House Commerce Chair said the FCC will impose conditions on the merger… We are not seeing similar activity in SIRI options today. (OPTNX)