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October 24, 2006

Here Comes the Fed

As expected, equities twiddled their thumbs ahead of tomorrow's FOMC meeting. While the October meeting is likely to be one of the more meaningless gatherings in recorded history (up there with Arab League summits and Italian constitutional conventions), such events have occasionally coincided with turning points in the market, regardless of the efficaciousness of their intended purpose. I'm not saying that tomorrow will be a turning point, only that it is a concept to keep in mind.

Several readers responded to yesterday's post to point out that a Barron's article gave the nod to Newmont Mining over the weekend. The author of the article is none other than Alan Abelson, the magazine's eloquent editor, and the mention came as part of his always-insightful weekly column. If the disparity in yesterday's action were isolated to Newmont, we would have our answer because Abelson's words carry quite a bit of influence and have frequently driven share prices in the days after his comments. However, I don't see how a nod to Newmont would help drive the whole XAU up 1.25%. Something else was going on.

My best guess is that a few large funds were unwinding some long metals/short miners hedged positions. Of course, this is just a shot in the dark. Those positions would have had to be rather large. In any case, metals assets continued their bizarre behavior in the early going with metals down another 1-2% and miners rallying. My instinct was to add metals via my futures account, but I deferred due to lack of any confident feel over the aforementioned divergence. Turns out the miners were on to something. Metals prices turned sharply and ended the day with 1% gains.

Obviously, adding to metals would have been a good move this morning, but my decision to abstain was nevertheless prudent. At times, these sharp movements are golden opportunities to fade (pun intended), but at other times they are warning signs. Without a good feel, I sat still.

I was not totally inactive today, however. I repurchased the SanDisk puts I sold last week after the earnings release. I nearly always close an options position when the stock spikes in my favor in order to capture the corresponding spike in implied volatility. To demonstrate the benefits of doing so, note that SNDK is nearly 2% lower than its price when I sold the puts, yet I paid 20% less to buy them back. My intention last week was not to sell simply to buy the position back. It is actually rare that I flip options like this. I decided to jump back into the SanDisk position simply because I think the current market rally is very long in the tooth, and the SNDK chart looks like it could go into total break down. I like the odds.

Disclosure: Long NEM; Long NEM Calls; Short NEM Calls; Long SNDK Puts

 

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