The U.S. markets have certainly enjoyed a healthy rally following the Donald Trump victory, adding on nearly 7.5 % from Nov. 8 before yesterday’s stumble. While that magnitude of move is impressive indeed, it pales in comparison to the explosive 20% gain tacked on by the Market Vector Russia ETF Trust (NYSEARCA:RSX) in the same time frame.
With Russian stocks now overbought on many metrics, I expect a short-term pullback on the red-hot RSX ETF.
Russian stocks, as one would expect, are closely tied to the price of oil. Russia is a close second to the Saudis in daily oil production, exceeding 10 million barrels per day.
Owing to that oil dependency to drive the economy, it is not unsurprising that Russian stocks are normally highly correlated to oil prices. Recently, however, that correlation has diverged dramatically, and RSX now trades at a huge premium to oil. I look for this relationship to converge, and Russian stocks to struggle.
RSX is also getting extremely overbought with a 14-day Relative Strength Index (RSI) approaching 80. Russian stocks rose for 10 straight days. Previous instances when RSI registered at such extreme levels marked significant intermediate-term tops in Russian equities. I look for this ETF to suffer a similar retracement once again.
The options market paints a similar picture of excess. Implied volatility (IV) is only at the 5% percentile, making options prices extremely cheap. Bullish call volume exploded as RSX made new highs, with the put/call ratio well below 0.1. A normal put/call ratio reading historically tends to be around 0.85.
These extreme types of option metrics are invariably a reliable indicator of excessive optimism that is the hallmark of a top in the underlying.
If you want to position for a pullback in RSX (and you should), IV at such low levels facors positioning with long options, as opposed to spreads.
How to Trade the RSX ETF Here
Buy to open the RSX Jan $22 puts @ $1.50
These are the traditional monthly options that expire on Jan. 20.
Target the $20 gap level as the first profit objective with the ultimate downside target at the $19.25 support area. Conversely, with long puts being subject to time decay, use a stop based on time.
I would revisit the trade near year-end and reduce the position size if RSX hasn’t cooperated with the bearish thesis.
As of this writing, Tim Biggam did not hold a position in any of the aforementioned securities. Anyone interested in finding out more about option-based strategies or for a free trial of the Delta Desk Research Report can email Tim at email@example.com.