Tuesday, March 14, 2006

Rolling Corrections... Up

Our fund's focus on the Housing, Oil, Gold and Semiconductor sectors seems to be bringing in dividends. Combining our long premium strategy with oversold conditions in these sectors is paying off handsomely, despite the fact that these same sectors are still in bear trends.

Before I go off patting myself on the back, the point I want to deliver is the following: these sectors have corrected up in their bear trends and that's the only reason we are long. Since our focus on them was due to their technically strong position, it bears to note that this technical position has been weakening with the prices rising.

Context:
  1. We have a bearish divergence on the indices. Say what you will, but I am sticking to my view of Qubes going below 40.
  2. We have Housing, Oil, Gold and Semiconductor equity sectors in confirmed and sometimes, severe downtrends.
  3. We have Gold spot at a very important inflection point. (As I said earlier, I see a strong short signal)
  4. We have Oil spot in a similar position to Gold.
What this means is that we have a series of rolling corrections to the upside in an overall bearish trend (or backdrop) of the respective markets. For a closer look:
  • Housing: KBH, LEN, RYL, HOV are up between 5 and 8% off their lows.
  • Oil: OIH, APC, AHC, RIG, PTEN, etc. are up between 4 and 6%.
  • Gold: NEM, AU, ABX are up around 6%.
  • Semi: starting to bounce here. I am treating this sector as a tell for the top in the overall market (meaing, once it rallies 5-6%, a short signal will be in place).
I know, with the S&P itching to break out to new multi-year highs it's a tough pill to swallow.

But realize that this scenario is the same as a series of rolling corrections to the downside in a strong bull market. Everything gets sold out and we go higher. Well, turn this upside down and we get "everything gets bought out and we go lower".

And, with VIX close to an oversold level of 11, selling call premium or even buying puts is where the odds are.

Cheers,
/Dmitry

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