Wall Street has gotten too comfortable with being long gold, U.S. Bonds and fear. But today the opportunity is to short these three things via the SPDR Gold Shares (NYSEARCA:GLD), iShares 20+ Year Treasury Bond ETF (NASDAQ:TLT) and iPath Series B S&P 500 VIX Short-Term Futures ETN (BATS:VXX).
It is easy to justify a rally in safety stocks like these. There is no shortage of fear mongers in the stock market — especially this year. Wall Street has been reeling from a barrage of headlines. The risks include geopolitics, economic worries and a tight Fed. We even have actual strikes on oil fields like the ones we just saw in Saudi Arabia this weekend.
Add to it that this week we also have the U.S. Federal reserve deciding on their next rate move. Although markets are expecting a Fed funds rate cut, investors are nervous. Not so much about the cut itself but rather about what Fed Chairman Jerome Powell will say in his question and answer session.
Since January, Chairman Powell has appeased Wall Street with a dovish stance and rate cuts. He has also done very well with his written statements. However, a few of his statements in the Q&A sessions have caused ruckus in the markets.
During such turmoil, money runs for perceived safety. So stocks like GLD, TLT and the VXX do well. Indeed, all three have rallied especially hard recently. But often, investors overdo it — and they just did.
These rallies were counterintuitive because stocks are also near their all-time highs. So last week, we saw a big breakdown in the GLD and TLT. Monday, all three funds rallied, but that’s not likely to last.
A couple of weeks ago I successfully shorted all three. I bought puts in the GLD in the TLT stocks and I sold call spreads into the VXX. But the opportunity here is that there might be more downside in these three tickers.
The rally was so long and so steep that the correction is not likely to end after only the first dip. This week will be pivotal — depending on what the Fed does and says.
Humans love the shiny gold stuff. Not only do we love it, it’s also getting harder and harder to get out of the ground. So as rarity increases, GLD stock price should continue to rise, right? In reality, that’s not the case. Though until recently, it seemed like there was no end to the GLD rally that started in June.
But all rallies come to an end. Now we have a situation where the gold bulls have gotten too comfortable being long their thesis. And last week the thesis may have started to unravel.
This is nothing against GLD stock itself. My bet is against the price action in the charts.
After a difficult Friday, GLD failed to capitalize on opportunities during a rally Monday. It faded at important pivot points, so if I’m short the GLD stock, I stay in it. I can even start shorting with October puts or by selling bearish call spreads for the next two weeks. Doing both would mean that I am very short gold. But at this point in time, with so much uncertainty, I’d rather be moderate in my positions.
As long as GLD stock is below $142.50 per share then bounces will likely continue to fail.
U.S. Bonds (TLT)
The love for U.S. Bonds also got too hot into mid-August. But September has not been as nice to TLT stock so it has already lost a lot of its froth. Like gold, investors over bought TLT in July with a complete disregard for fundamentals.
The bullish thesis for buying bonds was TINA — or There Is Not Alternative. But TINA works even better for stocks than bonds. The U.S. bonds only yield 1.6% for ten years and barely over 2% for 30 years. Compare that to the S&P 500 which is up almost 20% in nine months and close to all-time highs.
So TINA alone is not a reason to buy TLT stock at these extremely high levels. Here too, if I am short TLT I stay in it. It is likely headed to retest the breakout neckline near $132 per share. Admittedly the outcome of this week is binary off the Federal event on Wednesday. But there is a good chance that the Fed won’t be dovish enough and that in theory should put downside pressure on TLT.
As long as TLT is below $140 then the bounces won’t have follow through. Given the steepness of the rally, there are still a lot of stop losses to trigger. There were too many late buyers on the way up chasing the meme.
The rally on Monday in the TLT was not that impressive. The bulls failed to overcome the Friday high in spite of having the help of extreme geopolitical uncertainty and Fed worries.
The experts keep saying that volatility is here to stay. So why is the VIX below 15? The VXX which is a derivative of fear is also down 55% from the December highs. Clearly, this is a stock that can’t hold its greens. Aside from sporadic spikes, the VXX stock is a short.
But of the three trades laid out today, this is the one that I would wait for a spike to short. We are still in headline mode and headed into an event on Wednesday so patience is key. This is a recipe for surprise spikes in the VXX stock that would temporarily ruin the thesis.
So I would wait for a silly headline to cause a VXX stock spike and sell credit call spreads into it.
The weakness in the VXX tells me that overall, stock markets want to rally. All they need is a quiet period of time where politicians keep their mouths shut so as not to mess with the natural price action. That’s why this one is trickier to short than GLD or TLT. Moreover, during weeks where we have an impeding Fed decision, it is possible for both stocks and fear to rise in tandem.
During this yo-yo period, I don’t take giant trades with extreme conviction because of this geopolitical uncertainty element. Investors are best served to stay nimble and employ tight stops. Regardless of how good my thesis is, if price goes past my thresholds then it doesn’t matter if I’m right or wrong, I should close my position.
Nicolas Chahine is the managing director of SellSpreads.com. As of this writing, he did not hold a position in any of the aforementioned securities. Join his live chat room for free here.