The S&P 500 and NASDAQ 100 stock indices raced to All Time Highs early this week...on surging volatility...as word circulated that a whale (apparently Softbank (OTC:SFTBY) was buying billions worth of call options...it wasn't just the Retail Army trading in their pajamas. The Put/Call ratio plunged to new lows...the CNN Fear/Greed index hit full-on greed...and then the fever broke and Naz futures tumbled as much as 10% from Wednesday's highs to Friday's lows. Our best advice the past two weeks...don't be short Volatility. (2nd chart shows implied volatility on NASDAQ 100 call options.)
We got stopped for a small loss Wednesday trying to top pick the Naz...a "got a hunch/bet a bunch" trade but got the money back shorting Russell Thursday / covering Friday.
Gold traded through an $80 range this week...hitting it's high on Tuesday while the USD hit 28 month lows. We've held a bearish put spread on gold for over a month and closed it out Friday for a small gain. We successfully traded gold from the short side twice in August and decided to just go flat into the long weekend. The ticking clock had reduced the risk/reward potential on the gold spread.
Bonds had a good 5 day rally from last week's lows...with prices hitting their best levels Thursday as stock indices were tumbling. We had a bearish view on bonds earlier in August (but didn't get short for fear they would rally if stocks broke) but saw last Friday's reversal as a short term buy signal and we bought TNotes Monday...covered them Thursday for a nice gain ahead of the employment report risk Friday morning. Bonds fell Friday on the UE report, stories about China (and others) reducing their Treasury holdings and a rebound in stocks.
Crude oil continues to be a lack-of-demand story in our view and prices took a nasty break this week...October futures had their lowest weekly close in 10 weeks. We've held (and added to ) a bearish time spread in WTI (short Dec / long Mar) for about 2 months and that has been a great trade. (2nd chart shows Dec now trading at a $1.26 discount to March.)
The key question facing equity markets after the long weekend will be: was the break from All-Time Highs the start of something bigger...or just another BTD opportunity? We're essentially flat going into the long weekend (just hold the WTI time spread and a legacy S&P put spread) so we have an open mind and will let price action be our guide. We'd expect some BTD activity but IF the major indices start to roll over we'll be back on the short side. If stocks fall we think the USD rallies.
The US Dollar Index hit a new 28 month low early Tuesday as the euro traded above 1.20 for the first time in a year and a half. The euro couldn't sustain its gains and we went short on what looked like a possible key reversal. Also sold CAD and MEX thinking that a rising USD and a falling stock market would weaken those currencies. We covered the euro Thursday for a decent gain when it couldn't stay below 1.18...got stopped for a small loss on MEX and covered our short CAD early Friday morning for a small profit when it "wouldn't fall" despite a strong USD, weak crude oil and the spuz hitting 2 week lows.