Trade: Long the VIX
Time Horizon: 5-10 Trading Sessions
We went long the VIX (CBOE Volatility Index) on Friday ahead of the Memorial Day weekend. Using a short term VIX tracking ETN from iPath, VXX, we bought shares at $28.50/shr and capitalized on a large pullback from the highs 3-5 sessions earlier.
Trade: Short the S&P 500
Time Horizon: 5-20 Trading Sessions
For the first time in a LONG time it's becoming safe to bring on short positions relative to the S&P 500 equity index. The S&P 500 p/e ratio adjusted for inflation remains above 20 @ 21.13 as of Friday's S&P 500 close @ 1089, which suggests that the recent correction on the S&P has further to decline before it reaches fair value.
While we don't feel comfortable going long the S&P 500 at any p/e level above 15, given the trend of rising interest rates, we understand that risk takers will re-enter the market at higher current p/e valuations. So we're recommending this play as a short term position (i.e. 1-4 weeks or until reaching our profit target). Using the ProShares Ultra Short S&P 500 ETF (NYSEARCA:SDS) we can get relatively liquid 2x inverse exposure to the S&P 500 (recently +50 million shares/day). While we're looking to capitalize on instability and unresolved risks in the EU, trading the SDS will give traders short exposure to a basket of U.S. equities and avoid short term fluctuations in similar vehicles tied directly to the EU.
Trade: Short Crude Oil
Time Horizon: 5-15 Trading Sessions
We made a call to short Crude at $79.69, calling a price target of $70 /brl for the WTI continuous spot price and we cashed out when the WTI price hit that level. After closing that position at a profit, our hunch was confirmed. The uptrend in inventories had fought the rumors of accelerating demand for gasoline and mediocre distillate consumption, and instead that macro-economic and geopolitical forces are now leading prices.
You may notice that the MACD histogram would disagree with our position, however the flight from risk trade is back on and we are going against our technical instincts to put an opening stake into DTO at 75 bucks. We also have a buy trigger set at $80/shr which will give us short exposure when the WTI near month contract prices near the 50 day sma at $77.
The European Confidence report and the Chinese Industrial Purchase Managers survey have added to uninspiring anecdotes concerning bond market weakness in the U.S., Europe, and China, to reassure us of our bearish positions here.
Disclosure: Disclosure: Long SDS, Long DTO, Long VXX