Tuesday, July 20, 2010

Waiting Patiently With Confidence

This chart blows me away. It is a ratio chart of the $VXV (the 3 month CBOE predicted volatility) to the $VIX (current volatility). When this ratio is higher, it means the current $VIX reading is lower than what futures traders anticipate the volatility will be in 3 months. In other words, a higher reading in this ratio is a bearish signal, as it indicates complacency in current investors relative to the anticipated volatility in 3 months. Since the latter "guesses"/bets are traditionally only made by "sophisticated" market players, a high ratio suggests too much complacency. The caveat is that a ratio chart can move as both components trend in the same direction at different rates. Anyhoo, here's a roughly 2.5 year chart of the $VXV:$VIX ratio on a daily candlestick plot (as far back as my data goes) versus the S&P500 ($SPX, upper plot) during this time:

The bond market is screaming higher and the world's biggest bubble apparently has more deflationary medicine for us before it pops. The five year yield is screaming towards the lows made during the March 2009 stock bottom (18 month daily chart thru today's close follows):

Another deflationary wave is coming when it comes to the pragmatic version of deflation: falling asset prices (and thus a rising value of cash / increased purchasing power for Gold). I know this ain't the academic version of what deflation is, but I am trying to make money here and I could care less if the monetary base is expanding when all I really want to know is if stocks and commodities are going to tank again (they are IMO). Many Gold bulls will get scared on a price correction instead of viewing it as a buying opportunity. Gold is money. Gold thrives during a hyperdeflation.

Patience is no virtue when you're holding onto options, given the time decay. However, I continue to wait patiently for the next market meltdown while holding puts against the S&P500 and commercial real estate and I also continue to wait patiently in paper debt-based cash to buy more real money (i.e. Gold) and to buy Gold miners at a lower price. The Dow to Gold ratio will reach 2 before the secular stock bear market is over and we may well go below 1 this cycle.

[Most Recent Charts from www.kitco.com]

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