Sifting through all the trade ideas from the latest All Star Charts Quarterly Playbook, I happened upon a stock that is still several weeks away from earnings, is just a touch below all time highs, is trading at its lowest volatility of the year, and has a clearly defined risk management level. As you can imagine, this is pretty damn near the perfect set up for my favorite options play...
I want to make something perfectly clear: Semiconductors breaking out of a 6 month base to new all-time highs is historically not a characteristic of a downtrend for semi's, tech, or US Stocks as an asset class. These are facts. As go Chip stocks, so goes Tech. And in case you forgot, Technology is a quarter of the entire S&P500.
Feel free to argue against me on this. You'll lose. Semiconductors going up is NOT bearish for stocks. In fact, I can think of few things more bullish.
Here is a Monthly Chart of the PHLX Semiconductor Index $SOX breaking out to new all-time highs:
In this Episode of Allstarcharts Weekly, Steve and I talk about the underperformance of the S&P500 relative to both Gold and US Treasury Bonds. The big question I think worth asking is whether these are massive distribution patterns in US Stocks on a relative basis, or if these are just consolidations within an ongoing uptrend that has been in place for years already? If you're in the bear camp / recession coming crowd, then you would expect these tops to complete themselves to the downside. If you think stocks go on to make new all-time highs (I do), then these are not massive distribution patterns but just healthy consolidation instead.
How often does someone tell you to Remember to Buy In November? Probably not as often as you'll hear Sell in May and Go Away!
But what does this all mean? What are these silly nursery rhymes all about and why should we care? Or should we even care at all?
You'll hear even some of the smartest and most experience market participants dismiss market seasonality altogether, almost as if they're too good for it. Maybe they're scared of things they don't understand, like my 2 year old cousin gets when she's confused. Or maybe seasonality is not as intellectually satisfying to them as say something like, fed policy or trump impeachments.
Either way, we do care about seasonal trends at All Star Charts because they help us with both identifying market trends and risk management. Here's what US Stock Market Seasonality means to me:
A funny thing about Gold is, people who have any kind of opinion on it are either EXTREMELY bullish, or EXTREMELY bearish. There tends not to be any middle ground. No surprise it is such a politicized instrument.
Well, I don't care about any of that. What I do care about is volatility priced into options in this space continues to be pretty juicy at the moment while prices of many Gold underlyings appear to be stuck in a sideways holding pattern. (You won't hear any talking head loudly yell on CNBC: "I THINK GOLD GOES SIDEWAYS!" LOL).
And the boys at ASC agree with me, having published a neutral opinion on it in their recently published ASC 4th Quarter Playbook. So let's get into the play that makes most sense from here.
We've been bullish precious metals since the 4th quarter last year and even coming into 2019. We're not gold bugs, thank goodness. The risk vs reward was just skewed in favor of the long side, for a variety of reasons.
One of those was the fact that commercial hedgers were actually net long. They're never net long, and literally always hedged. For me, these Commitment of Traders reports are usually just noise, EXCEPT when they're at extremes. We want to pay attention when the rubber-band is stretched. And so we did, and Gold ripped!
Now we have the opposite scenario. Commercial Hedgers last month had on their largest net short position in history (345,145 contracts):
Last month, I put a trade on that didn't work out. Believe me, it happens (shocking, I know! /EndObviousSarcasm). There was a level that invalidated my thesis and it was breached. I don't fight with price action. When price is speaking, I listen. So the trade was exited and I moved on, accepting my manageable loss.
Fast forward just one week from my exit and the chart has repaired itself and has established a newer, clearer level to lean my risk management against. My overall bullish thesis on this stock hasn't changed, and now with new levels to observe, I'm going back in for a new try with a similar spread, but at new strikes and a new expiration.
Think about how well everything is going this year! The S&P500 is up almost 20%. Bonds are up 22% and even Gold is up 17%! Heck Bitcoin has more than doubled! Can things get any better than this???
