Trotsky on the markets -
Date: Wed Mar 29 2006 16:19
trotsky (still no joy) ID#248269:
Copyright © 2002 trotsky/Kitco Inc. All rights reserved
for gold bears...and there are many that are either outright bearish or at least very skeptical. and yet, here we are at a new high.
the quantitative sentiment backdrop continues to look supportive for the bullish case - not much has changed since the last update, and that indicates more upside short and medium term.
personally i have only one worry at this stage, and that mostly relates to the broader stock market. imo when this market tanks, it will do so with very little warning and VERY fast. the reason for this is that while trading volume has not escalated since the 2000 top, open interest in stock and stock index options has literally gone off the charts. this is a situation VERY reminiscent of the period leading up to the 1987 crash. everybody is selling non-existent volatility, convinced that the period of low vola premia will last forever. well, it won't. it is an iron law that protracted periods of low volatility eventually give way to high volatility panics.
now, since open interest in put options is these days far larger relative to trading volume in the underlying instruments than it used to be a few years back, a decline could easily become a waterfall, as everybody tries to dynamically hedge risk at the same time. this is very similar to the interaction between portfolio insurance and program trading during the '87 debacle. ironically, this time around the very program trading curbs that are supposed to avert such a scenario might actually serve to give it an extra shot in the arm, as the curbs will remove liquidity from the market at a critical juncture. it's coming, i just don't know when. that's as i said my biggest worry - it's just as likely to happen next week as next October - that is impossible for me to determine. however, everybody should be aware of the huge risk this market is facing. |
