Ron Paul puts it, tries to cure the effects of monetary inflation with more monetary inflation. What irritates me most about this whole process is that so much"> Ron Paul puts it, tries to cure the effects of monetary inflation with more monetary inflation. What irritates me most about this whole process is that so much" />

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September 27, 2008

Chart Litter

This past week's action centered around the proposed bailout package being debated in Congress, a foolish endeavor which, as Ron Paul puts it, tries to cure the effects of monetary inflation with more monetary inflation. What irritates me most about this whole process is that so much attention is being paid to how we save the banks and so little attention is dedicated to how the mortage crisis began in the first place. We also have a Congress unwilling to consider alternative solutions to throwing piles of taxpayer money at the issue.

Back to the action this week... the motion unfolded in two phases. Monday and Tuesday were all about unwinding some of the exuberance of the initial reaction to the bailout plan while Wednesday through Friday put us in wait-and-see mode. And you can cut the tension with a knife. Traders everywhere are expecting a sharp reaction once an ultimate deal is announced, and this anticipation has spiked implied volatility as reflected in the VIX:

vix chart

Now, we've already seen one 10% surge related to the bailout, and given that the ultimate version is likely to be restricted and watered-down, I really don't see another mega upside reaction materializing. Late Friday, I decided to put on part of the short call position I described in the comments section of the previous post. For the most part, I am selling volatility. Even if the market rallies post-bailout, IV premiums are going to plummet, so I don't see major damage being done by the position. My suspicion, though, is that the announcement will be a sell the news event.

There is not much else to say about stocks until something comes out of Congress, so I'm going to litter the rest of this weekend post with charts and opinions.

index chart

silver chart

gold chart

Despite the scent of a bull trap, I expect metals to be stronger near-term along with commodities in general. I will probably open a modest silver position this week and hold it until I see sign of a rally failure. Note that this opinion may seem to contrast Thursday's post in which I expected near-term weakness in silver. However, I noted that silver's weakness would be limited to about 75c, and I still do not rule out this modest pull-back before we see more strength. However, when the upside potential is nearly $3, waiting for a 75c pullback that may or may not happen is simply getting too cute.

oil chart

index chart

index chart

indicator chart

If we do, indeed, see a retest of the September low, I will have the utmost interest in where the put/call ratio stands at that time. If it reaches panic levels, I would anticipate a successful retest and a rally through the election. If this indicator does not show panic while testing the low, the market may surprise everyone... bulls and bears alike... with a doosie of a drop.

That's it for now. I'm working on a minor redesign of the home page which will include links to valuable resources and the first of a series of investment book reviews I plan to write. Hopefully, the update will be ready for launch this weekend. Have a good one...

 

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