Earlier this year, Jeffrey Gundlach presented a number of interesting contrarian
pairs trades at the Ira Sohn conference. Six months out, they have done extremely
well. Basically, they were mean reversion ideas on historic extremes. Short
Apple - long natural gas. Long Spain - short the S&P. After this week,
the short Apple / long natural gas wager (actually introduced at the end of
April) is up almost 100%. The long Spain / short the S&P is up ~ 17%. Below
is the latter Gundlach trade featuring Spain and the S&P.
With that said, those looking for a little protection in dipping their toes
on the long side of US equities here, may want to consider hedging themselves initially with
a short position in Spain. Why?
As I have pointed out over the past two years, silver has led turns lower
in the euro and Spain. However, over the past week the gold miners have collapsed
rather precipitously - in a manner similar to their leading moves of Spain's
equity market and the euro this year.
Should the US equity markets continue to slide - or worst; the US dollar is
likely to strengthen quite considerably. In this event, I would expect Spain
and Europe to lead once again on the downside. Below is a modified version
of the Gundlach trade - which I suspect reverts, that substitutes the NDX for
the SPX. Interestingly, it crosses flourishes of both pairs trades.
Although I am an active trader, I have always taken a broad perspective when
approaching the markets. I respect the Big Picture and attempt to place each
piece of information within its appropriate context and timeframe. I have found
that without this approach, there is very little understanding of ones expectations
in the market and an endless potential for risk.
I am not a stock picker - but trade the broader market itself in varying timeframes.
I want to know which way the prevailing wind is blowing, where the doldrums
can be expected and where the shoals will likely rise. I will not claim to
know which vessel is the fastest or most comfortable for passage - but I can
read the charts and know the risks.
I am not a salesperson for the market and its many wares. I observe it, contextualize
its moving parts - both visible and discrete - and interpret.
I practice Market Anthropology - Welcome to my notes.
Erik Swarts is not a registered investment advisor. Under no circumstances
should any content be used or interpreted as a recommendation for any investment,
trade or approach to the markets. Trading and investing can be hazardous to
your wealth. Any investment decisions must in all cases be made by the reader
or by his or her registered investment advisor. This is strictly for educational
and informational purposes only. All opinions expressed by Mr. Swarts are subject
to change without notice, and the reader should always obtain current information
and perform their own due diligence before making any investment or trading
decision.
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