Risk Reduction Alert

For those who wisely ignored my advice to sell the SPDR Gold Trust Shares ETF (GLD) June $160 Puts on May 3, good for you. The options are now trading at $10.50 and you have a profit of 147%, adding 14.7% to your annual return. This will no doubt be your home run trade of the year.

If you still have these, it is time to give thanks for your good fortune and head for the sidelines. You don’t get to do trades like this very often. Selling out here allows you to avoid the time decay hit as we run into expiration on June 15.

Gold has now fallen $100 since my last ill-timed sell recommendation. Tough luck if the rumor that the International Monetary Fund was going to sell its gold reserves to bail out Europe hit the wires two days later. I had heard about this from my European central banker friends a month earlier, which is why I put on such a big short position in the first place. Alas, timing is everything in this business.

The yellow metal is now approaching both a severely oversold condition and major support at $1,510, and it would be unwise to continue to run the position. The same is true for every other risk asset in the universe, including the S&P 500 (SPX), the Russell 2000 (IWM), the NASADQ (QQQQ), oil (USO), silver (SLV), copper (CU), the Euro (FXE), and the Australian dollar (FXA).

Use whatever metaphor you want; the rubber band has been stretched to the breaking point, the paddlers have all bunched up at one end of the canoe. The dollar index is up 13 consecutive days, and the Dow is down 9 out of 10. How long do you want to keep flipping a coin and relying on heads coming up every time?

In the meantime, the big “RISK OFF” assets of Treasury bonds (TLT) and the Japanese yen (FXY) are starting to make rather shrill topping noises, giving additional signals that it is time to shrink your book.

Finally, I have my own performance to look at, with May thankfully the most profitable in the 18 month life of my Trade Alert Service. As of this morning’s marks, I am up an eye popping 22% so far this month. If the past is any guide, big numbers like these are a great “sell” indicator. Mean reversion can be a cruel and unfeeling bitch, worse than an Internet date, so watch out.

Take profits here and you will have plenty of dry powder to resell the barbarous relic and other risk assets in any dead cat, short covering rally that may unfold into the May month end book closing and into June. Then we can position for the final low in the summer, which should be downright scary.

Sell these ETF Alternatives:

the DB Gold Short ETN (DGZ) 1X short gold
the DB Double Short Gold ETN (DZZ) 2X short gold
or buy to cover the SPDR Gold Trust Shares ETF (GLD) sold short on Margin outright


Time to Pare Back Some Risk