Morality is of the highest importance – but for us, not for God.
The COT index number for SPY comes in at [11.4%] This number has been consistently negative, yet the market has risen inexorably. Clearly the number for our purposes is ‘broken’ we simply can’t place a trade in any expectation of a winning trade.
However, while I am not willing currently to trade the number, I am wary that due to the market rise – who is actually buying? Watching the CNBC Fast Money show, consistently there is a discussion as to who is actually buying this rally. There have been a number of prominent Hedge Fund managers, David Tepper for one this week came out in support of a fundamentally sound market. Josh Brown also reiterated that on a valuation basis this market is buyable [reversing his seasonality meme].
This is not a fundamental market. This is a market driven by liquidity, supplied by the Central banks of the world: Federal Reserve, Bank of Japan, ECB, and even the Bank of England is joining the party. New Zealand is playing currency supression games.
That the COT index signals selling, indicates that this market is unstable and highly dependent upon continued liquidity. Should that liquidity, or even the confidence engendered by this liquidity fade, this market is likely to correct hard and fast.
While the duCati portfolios continue to be long [they are a long only strategy] they are starting to trigger sell orders that are either being filled, or are close to being filled. Essentially they are gradually increasing the cash position, which will cushion any moves to the downside, but reduce gains incrementally to the upside. This is per the strategy and methodology. As such I can sit with the bull move very comfortably. The SPY portfolio has been long since December 21 2011.
The GLD COT number is [-0.2%] Again, there are some structural anomalies. Financial gold, ETF’s, Futures, etc, reflect the sell-off. Physical gold however is being accumulated in Asia.
As a result of the loss of reliability in the COT numbers currently in the short term [days/weeks] but cognizant of the potential in the longer term [months] a new strategy becomes prudent.
The advantage of this strategy is that it is market neutral. It is volatility based, viz, a big jump in volatility results in big profits. It can capture big short term gains, but can also play the long game where really outsize profits lie.
This week, and each week, I will supply one back-spread trade. The trades will come as a separate attachment so that they will not be disclosed on the blog. Profits can be locked in, and the position allowed to run so that really large profits have time to accrue without placing already earned profits at risk.