By
Tom Dyson, publisher, The Palm Beach Letter
Monday, December 14, 2009
I hope you haven't bought silver....
As I'll show you in a minute, right now, traders are making far more bullish bets than bearish bets in silver.
So if you're a contrarian trader, you should be selling silver, not buying it.
What about financial stocks? Traders are much more interested in the short side of financial stocks than the long side.
Contrarians should be buying banking stocks, not selling them.
If you can time it right, the surest way for you to make a quick buck in the stock market is to bet against the crowd at extremes. When you see traders all piling onto the long side of the market and ignoring the short side, you know betting on the short side is more likely to show the profit. This is called contrarian trading.
Today's contrarian indicator comes from the options market. The options market is great for measuring sentiment. It is much more speculative than the stock market. Traders make crazy bets on short-term outcomes, using lots of leverage. They wear their hearts on their sleeves. Also, the options market is a zero-sum game. One trader's profit is another trader's loss. So it's always clear who the bears are and who the bulls are.
To tell which side of a trade is popular, simply compare the prices of call options with the prices of put options. Call options are bets stock prices are going to rise. Put options are bets the prices are going to fall. If call options are more expensive than put options, you know there's more demand for them than demand for put options.
Let's take financial stocks as our example. We'll use IYF. It's the iShares exchange-traded fund (ETF) for the large banks and brokers. (I recorded the prices at last Thursday's close.)
Bet
Cost
IYF rises 10% by March
$0.80
IYF falls 10% by March
$1.25
As you can see, making the bearish option bet costs over 50% times more money than the bullish option bet. Therefore, the bearish bet is far more popular than the bullish bet among option traders.
Let's repeat this exercise with silver, using the silver fund (SLV) as our proxy...
Bet
Cost
SLV rises 10% by April
$0.92
SLV falls 10% by April
$0.67
In banks, the bearish trade was more popular. It's the opposite case with silver. The bullish bet costs almost 40% more than the bearish bet. There must be many more bulls than bears in silver.
I repeated this exercise with ETFs for the S&P, gold, oil, real estate, Chinese stocks, Russian stocks, and gold stocks. I compared option strike prices 10% above and 10% below the current price, with maturities between February 2010 and April 2010. Here's what I found...
Fund
Which costs more?
By how much?
Therefore, the crowd is...
Financials
IYF
Put option
56%
Bearish
Silver
SLV
Call option
37%
Bullish
Gold
GLD
Call option
26%
Bullish
Stocks
SPY
Put option
174%
Very bearish
Oil
USO
Balanced
0%
Neutral
Real Estate
IYR
Put option
37%
Bearish
China
FXP
Put option
44%
Bearish
Russia
RSX
Put option
18%
Bearish
Gold stocks
GDX
Balanced
0%
Neutral
Of all the investments I looked at, the S&P 500 and gold produced the most interesting results. On Thursday night, when I worked on this, it was a coincidence SPY (the S&P 500 fund) and GLD (the biggest gold fund) both closed the trading session with the same price per share... $111. But look how different their March 2010 option prices were...
With both GLD and SPY trading at $111, the...
GLD $120 call option was $3.09
SPY $120 call option was $1.25
GLD $100 put option was $2.08
SPY $100 put option was $2.30
Look at the GLD call option. It's almost three times more expensive than the SPY option. On the other hand, the SPY put option is more expensive than the GLD put option.
Said another way, gold is a lot more popular than the S&P 500 among options traders right now.
I'm not saying you should short gold or buy the S&P 500 immediately. I'm merely pointing out sentiment is lopsided right now in these two investments. If you're a contrarian, trade accordingly.
Agrium (AGU)... fertilizer
Potash (POT)... fertilizer
Cigna (CI)... health care
WellPoint (WLP)... health care
UnitedHealth Group (UNH)... health care
Disney (DIS)... entertainment
Starbucks (SBUX)... deficit coffee spending
Canadian Pacific Railway (CP)... railroads
Burlington Northern Santa Fe (BNI)... railroads
Verizon (VZ)... telecom
High Yield Bond ETF (HYG)... bonds are being paid back
Dillard's (DDS)... department stores
International Royalty (ROY)... Dan Ferris was right!
NetApp (NTAP)... data storage
Southwest Airlines (LUV)... airline
Duke Energy (DUK)... utilities
TransCanada (TRP)... pipelines
El Paso Pipeline (EPB)... pipelines
Enbridge Energy (EEQ)... pipelines
Williams Partners (WPZ)... pipelines
Sunoco Logistics Partners (SXL)... pipelines
NEW LOWS OF NOTE LAST WEEK
Alon USA Energy (ALJ)... oil refining
First California Financial (FCAL)... bank
Central Virginia Bancshares (CVBK)... bank
How to Be Extra-Ordinary By Dr. Steve SjuggerudFriday, December 11, 2009
The two other speakers that evening were smart guys. But they're investing the ordinary way. They're fishing in the same pond as everyone else... using the same tools. They're hoping for something extraordinary. But you don't get extraordinary results with ordinary methods.
How to Trade Precious Metal Stocks Right Now By Matt BadialiThursday, December 10, 2009
Gold miners are selling for an average of 35 times future earnings right now. That's too high. I won't pay more than 20 times future earnings, even when the price of gold is on the rise (and it's much better and safer to buy gold miners for five or 10 times earnings).
What the Government Should Do to Save America By Dr. Steve SjuggerudWednesday, December 9, 2009
This work is a long way from Lee's dream. But Lee's been forced to recalibrate... to hit "reset." I'm sure he's not the only one...
Warning: The Stock Market Is Extremely Overvalued Right Now By Tom DysonTuesday, December 8, 2009
"The S&P 500 is priced to deliver one of the weakest 10-year total returns in history except for the (ultimately disappointing) period since the mid-1990s."
