I have to admit that I am getting a little frightened. While the masses (I think you know who you are) celebrated yesterday’s Fed announcement (for the record, the phrase QE, or “quantitative easing” is out, and QG, or “quantitative gushing” is in, mostly because it is more succinct than QFH, or “quantitative fire hosing”) that the easy money will continue to, um – somehow “flow” does not seem like a strong enough word – the stock market’s Pavlovian response to “another round of punch”, so to speak, sets up an even darker prospect for that day that is most assuredly “out there”, when the Fed finally says, “no more for you”.
Picture a room fool of crack addicts and every month the dealer walks in and announces “more free crack for everyone!” If you are having trouble visualizing it, just think of yesterday afternoon in the stock market. Now the one thing we know for sure in all of this is that someday the Fed will have no choice but to “taper.” Which raises the “mildly important” question: If the masses react in a wildly bullish Pavlovian manner when the Fed “giveth”, then can we make a reasonably intelligent guess as to how the market will react when the Fed “taketh away?” “Yes we can.”
So picture that same room full of crack addicts again. Now this time imagine the dealer walks in and announces “sorry, no more crack for you.” Now picture what happens next in that room. Now picture that happening in your 401K……..
The VIX and Gold Stocks
In recent posts I reaffirmed my bullishness (http://tinyurl.com/kx27bpn)on gold stocks and highlighted a simple “throwaway” hedge using call options on ticker VXX (http://tinyurl.com/k8gedgy). Well obviously, the “hedge” trade using VXX was a bust as volatility tanked when the “(Pavlovian) dogs started barking.” But the option only cost $161 so I am inclined to let it ride “just in case” the revelers sober up sooner than expected. As a side note, that’s the purpose of a “hedge”. You risk a “couple of bucks” on the chance that it will pay off big if things go “the other way.”
On the other side of the coin, gold and gold stocks went – for lack of a better phrase – “berserk” after yesterday’s Fed announcement. As I type in the “wee” hours, gold futures are $75 above their recent low a few days ago and ticker NUGT – the triple leveraged (speaking of “crack like investment things”) gold stock ETF – was up over 27% yesterday alone. “Alex, I’ll take Inflationary Fears for $100.” Hey, wait a minute. If Fed easing (“gushing?”) is inflationary then why is the stock market going wild? Oh well, who am I to question why?
I am by and large a “go with the trend” kind of guy. So while I can voice my own (and I am guessing that for a lot of you, your) fears, the reality is the trend of the stock market is “up” (in case you hadn’t noticed). But do keep your eyes peeled between now and the end of October. Key price levels:
These are the 9/16 highs that were obliterated yesterday. Watch to see if the market runs out of gas and these ETFs fall back below those levels. While I have always been hesitant to use phrases like “blown it’s load” (as in “the market has”) when attempting to write a professional piece, oddly, it seems that it may be appropriate here. So to close simply note that now is a time to be paying close attention to the action of the market. Enjoy the ride but don’t forget to look down once in a while. Which leads us directly to:
Jay’s Trading Maxim #46 which clearly states: “Don’t gaze at the stars while sprinting.”
Forward, Fellow Fedheads!