Tuesday, June 06, 2006

Enter the Reign of Chaos

It's been a while since my last post as we have made a conscious decision to step back and reevaluate the current market environment. A big part of me is very excited about this market - as said on numerous occasions, this is the perfect trader's market and the opportunity that's in front of us is on par with year 2o00.

Now, when I say "year 2000" I don't necessarily mean that we should sell the world short. The reality is that noone knows whether the world should be sold short, but in all likelihood, there is going to be more pain followed by relief, repeated a few times over and followed by a steady recovery. That's what the history says. Of course, if you subscribe to the Elliot wave theory, then we are in the middle of leg "C" on the way down which should take us to all time lows in the coming years. The sky will fall, fire will rain and the seas shall engulf our peaceful existence forever. Enter the reign of chaos.

As a trader I don't care which scenario works out in the end (except for that falling sky bit) as long as we make money. Here's what on the table:
  1. NDX-100 has rejected a very strong long signal with yesterday's sell-off. Unless we have any sort of reversal today, we have an opportunity to sell the index short. I fully expect it to take out the low of 1554 set on 5/24 and reach 1520. A couple of ways to play this: for income, sell 1525/1515 June put spread (you can get 15% on right now); for a directional play, sell the futures. I won't recommend buying options here as I don't have faith in vol keeping this level.
  2. The Housing sector completely blew up and there are markings of a bottom all over it. I do feel there will be a serious reversal coming within the next few days and the recommendation here is to get long calls. Granted, Housing has been our bane, but consider the fact that we're going to be right at some point :) Joking aside, RYL July 45 and 50 calls are our vehicle of choice. Other stocks like PHM, DHI show very similar formations.
  3. Energy sector has seen a lot of volatility and the way to play it here is to put on a few gamma trades (BTU, APC, KMG) and flip the stock. I doubt there are any directional odds in this sector worth considering. But you can bet on realized vol outpacing implied.
  4. Gold has been in a steady, almost picture pefect downtrend after its big top. Whlie I have no idea whether this top will get taken out, I do think there is a trading bottom coming up close to 600 level on August contracts. We are looking to start buying it below 615.
Last but not least we need to consider the global picture. We track Japan, India, Russia, China, Turkey and Brazil. I won't go into particulars but will say that a lot of these markets have experienced classic crashes: Russia is down 30%, India is down 33%, Brazil - nearly 20%, Turkey - over 40%. China and Japan fared better and while down substantially, don't qualify for "crashes".

What this tells us that the emerging markets of the world had their first "wide" sell-off. It seems that with the overall global sentiment being strongly negative, the less mature markets took the largest hits. If history is any guide then we have a clear macro buying opportunity. Certainly I don't expect a U-turn and as I said before, more pain is likely ahead. But at least tactically, buying some of these markets will pay huge dividends down the line.

We live in interesting times folks. Again!



At 5:46 PM, Anonymous Anonymous said...

Great Blog Dmitry !
Thanks for Sharing ur thoughts.

Can you please elaborate on "Energy sector has seen a lot of volatility and the way to play it here is to put on a few gamma trades (BTU, APC, KMG) and flip the stock".
I am new to options world and learning about different strategies. Any links to literature to help me will be appreciated.


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