As you are well aware, it is our belief that the price action over the last past 18 months in global risk assets, which has included an outright crash in commodities, and a crash up in the dollar, is evidence that the 7 year party is over. Those of you who have lived through bear markets, particularly protracted ones like 2000 to early 2003 know quite well that bear market rallies can be violent, last longer than one would expect, but usually fail where they are supposed to, at the established downtrend.
Gold and Gold miners topped out in 2011, with the GDX (gold miner etf) recently down 80% from its 2011 peak, prior to the 25% rally in the last month:
In a post in a post from Aug 10th we highlighted a note where our friend Larry McDonald, the Head of U.S. Strategy at Societe Generale. He believed GDX was in a very oversold condition, and that a counter-trend rally was perculating, similar to Bear Market ones in the past 4 years:
Bear Market Rallies
May – September 2012: 35%
June – September 2013: 39%
December – March 2014: 41%
November ’14 – March ’15: 36%
July 2015 – Future: ???
GDX is close to the down trend-line, which is just below the early July breakdown level of $18. That also corresponds with the etf’s 200 day moving average (yellow below):
Short dated options prices have shot up dramatically since the July breakdown, and the subsequent 25% bounce with 30 day at the money implied volatility now at 50%, making long premium directional trades very challenged:
So whats the trade?
We’d like to play for a move back to $14 in the coming months, but at a better entry, closer to $18. With vol high, short premium trades make sense. We’ll keep our eye on the etf and ideally place an in the money fly or similar at our preferred entry, targeting a move back towards $14.