Hello Darkness My Old Friend……

Posted on 07/29/2011


I’ve come to talk with you again
Because a vision softly creeping
Left its seeds while I was sleeping
And the vision that was planted in my brain
Still remains
Within the sound of silence

-Paul Simon

What you’re hearing is the whoosing sound of an economy headed back into recession (which many people could argue never ended). I’m reminded of Will Ferrell’s character in ‘Old School’ when he’s stammering around after being shot with a tranquilizer gun. Not pretty.

The next round of Quantitative Easing just became much more likely with headline Q2 GDP coming in at 1.3% and (steady yourself for this one….) Q1 was REVISED FROM 1.9% to 0.4% and the personal consumption component fell from 2.1% to 0.1 (expected 0.8).

The S&P futures are RIGHT AT THE 200 DAY MOVING AVERAGE (1283). Agressive types could BUY futures here (1283), but I would ONLY do so with a tight stop (5 points on a big S&P = $1,250 or 10 points on the Emini = 500). I would look for 2 – 2 1/2 times my stop on the profit side. If you’re long from 1283 (big S&Ps) with a 5 point stop, have your exit at 1295. I would NOT take the position into the weekend – in fact I expect we’ll close today either on highs or on lows depending on DC newsflow.

Crude is off by over $1, so our ratio put spread (financed by upside call sale) continues to look better, particularly as move into the weekend (if they start to decay quickly, which may not happen in this environment).

I recommend playing this VERY CLOSE to the vest. The confluence of continued political horse trading and absolutely atrocious GDP numbers have created a toxic situation. The VIX could be back in the 30s in short order (which is where it went on the Japanese earthquake/tsunami news in March….and the S&P futures traded 1238). If we break the 200 day moving average, which has been considerable support since Summer 2010-pre Jackson Hole QE2- then look out because there isn’t much support until 1250.

IF the VIX does trade 30, I would do ONE of TWO things: either SELL a 10-15% OTM PUT in the S&P or RUT because the panic will mean SKEWED UP puts, OR look for a place to BUY TWO Platinum futures and SELL ONE Gold future (which I consider an excellent proxy for risk on – where PL outperforms- and risk off – where GC outperforms).

Good sleeding, it’s slippery out there.