The Arena
FOUR… Your portfolio is shouting with hope the unsuspecting investor will duck, dodge, or dive out of the way to avoid being knocked out by the errant golf shot!
Well, this is a mess of a year from an investment perspective, or should I say every perspective. I mean we’ve gone from a record breaking bull run to the ugliest bear market I’ve witnessed in my lifetime. However, the biggest problem I see is that nothing is changing. No, we’re only acclimating. The Federal Reserve continues to notch up interest rates while feeding us the same garbage line, “we have to get inflation under control”. My question is, “at what point is it under control?” Honestly, everything is more expensive now, we know that, we see it virtually everywhere. Not even the fast food industry could avoid the sweeping inflation. The once “dollar” menu is now the “$2 dollar menu”. Seriously, this is a mess and the truth is I’m pretty sure more downside is ahead.
From my analysis, it looks as if the S&P 500 ETF, SPY, is headed for around the $300 level before it finds any meaningful support. However, many “quality” equities have already been decimated and are trading well below a supposed “fair value”. Should SPY reach the $300 level or even fall further any existing portfolio would have been depleted by 50% or more. So again, I ask, “what constitutes having inflation under control?”
The Coach
Taking my eyes off of equities for the moment I’ve starting looking at other asset classes to find an opportunity. Today, I’ve stumbled across the Vaneck Junior Gold Miners ETF (GDXJ). GDXJ is slightly more volatile than its brethren GDX so we should be able to collect a larger premium for the risk we’re accepting. Currently, GDXJ has an IV percentile of 79% while GDX sits at 86%. Worth pointing out, and in agreement with what I’ve already mentioned above. GDXJ sports a lower IV but offers a larger premium. So I’m looking at it rather than GDX for that reason alone.
Leaving equities alone for the moment, options to trade options become slightly more limited. GDXJ has been in a downtrend the later half of this year down nearly 43% from its 52 week high. Although, price does appear stable in this range and hasn’t broken free since entering the range back in June. The counter argument would certainly be that given the extended range bound movement we should look for a breakout sooner than later. However, with gold trading more in line with equities this year rather than conversely to them, I’m not currently seeing a change in sentiment. Could I be wrong, yes, but the market has traded lower and gold seems to have followed. If more downside is ahead for equities, I’m not sure I’m fully convinced gold rallies further ahead at this time.
For a further look at the expectation of the Gold market moving forward here is a breakdown from Trading Economics: Gold Market Forecast.
The Attack
Unless you’re looking to buy puts as a hedge to your portfolio, I’m not sure what other investments I’d consider in the current environment. I’m thinking we see the market attempt to complete its first pullup with a 100 pound dumbbell attached to its ankles this week. It may lift up but it won’t hold long. With that I’m eyeing an iron condor on the Vaneck Junior Gold Miners ETF (GDXJ) with 40 day’s to expiration. Sure, this could be the moment I look back at and say, “whoops, that was a mistake” but with gold liking this current channel I’m thinking its worth the play.
What do you think, is gold ready to trade against the market again and become the “safe haven” asset we thought we knew? Let us know in the comments below.
Bullish assumption
| Buy To Open | Sell To Open | Entry Order | Total Risk | Prob. of 50% Profit |
| 18 NOV 22 28 Put | 18 NOV 22 27 Put | $33.00 | $67.00 | 75% |
Neutral assumption
| Buy To Open | Sell To Open | Entry Order | Total Risk | Prob. of 50% Profit |
| 18 NOV 22 36 Call | 18 NOV 22 35 Call | $30.00 | $70.00 | 70% |
| 18 NOV 22 24 Put | 18 NOV 22 25 Put |
Bearish assumption
| Buy To Open | Sell To Open | Entry Order | Total Risk | Prob. of 50% Profit |
| 18 NOV 22 33 Call | 18 NOV 22 32 Call | $31.00 | $69.00 | 76% |
God Bless,
Jeff
