Let’s go back and think of the politically charged events over the past year.
The two we normally focus on is the Brexit in the summer and the US election this past November.
Both were not anticipated outcomes, both had initial negative price reactions.
And both also had strong, strong rallies after the uncertainty fades.
We had a “mini-event” like that with the Italian referendum to reduce the number of Senate seats.
I’m not making this up.
And the thing is, if you have someone try to properly explain the ramifications it would be difficult to keep a straight face.
Yet we ended up with a “No” vote which was supposed to be bad for the markets… and we had a mini selloff followed by a pop higher.
So we’re back near all time highs, again. And it’s probable that we simply see a grind higher into the end of the year.
For this newsletter, we’re going to focus on two non-stock trades as they have been oversold for quite some time.
If you’re looking for other fresh trades, keep an eye on the newsletter archives for actionable trades in GS, V, TXN, and CAT to name a few.
Trade #1: GLD
With the strength in the dollar, gold has not had a good month. Over the past 20 trading days it has sold off over 10%.
That doesn’t happen very often, and it appears to have a slight statistical edge.
Here is what the normal 20 day returns distribution looks like:
And here is what the returns distribution looks like after a 10% selloff in 20 days:
So while there are still negative distributions, I find it unlikely that we will have tail risk, even with the Fed rate hike looming.
Expected Price: 111.40
Sell to Open GLD Feb 104/101 Bull Put Spread
Tier 1: Enter at 0.33, exit at 0.08
Tier 2: Enter at 0.42, exit at 0.30
Tier 3: Enter at 0.60, exit at 0.40
Trade #2: TLT
We’re seeing a similar selloff in treasuries.
The spectre of a rate hike is causing bids to disappear as investors expect higher yields down the line.
Now I’m pretty sure we’re going to see a hike, yet it looks like it’s getting priced into bonds already.
Here’s the returns distribution when TLT sells of over 8% in a 20 day period:
Now this may not seem like a massive sample size, and it really isn’t… but the returns are just “stacked” with a pretty tight variance.
Yet it’s still a negative bias. We can take advantage of that by not placing orders here and instead anticipating a bit more of a selloff, probably with a momentum divergence.
The next support level is at 115, which should act as a magnet. I’m OK with anticipating a little bit and entering around 117.
Expected Price: 117
Sell to Open TLT Feb 109/106 Bull Put Spread
Tier 1: Enter at 0.38, exit at 0.08
Tier 2: Enter at 0.47, exit at 0.33
Tier 3: Enter at 0.63, exit at 0.43