Saturday, July 2

Money Supply heading South of the border

This graph from an article over at The Daily Reckoning gets to the heart of the matter. The stock market is in for a heap of trouble this fall given this kind of monetary environment. MZM has gone negative and the yield curve is flattening, and may go negative as well.

This adds up to a recession for the economy and a downtrend for the stock market, with the possibility of a good old fashioned whacking before the end of the year. The August-September time period is the most likely candidate for the lows of the year, according to The Stock Trader's Almanac put out by Yale Hirsch, and the year after a Presidential election tends to be the worst.

If this is true what should you do? If you've already made some money this year on a good pick or two, think seriously about banking it, or at least hedging. If you want to make some money on the possible down turn, buy some puts.

Implied vols, which means options prices, are low at this point, i.e., calls and puts are cheap. This varies from stock to stock of course but as an example, let's take a look at the QQQQ options:

As you can see, the implied volatility (yellow line) of the Q options is at a low. Notice how it spiked up in August of last year, which is another way of saying that the calls and puts suddenly became a lot more expensive, or that those who had the foresight to buy them just prior, made a lot of money. Will this August be the same?

Of course no one can predict the future, but those who consistently make money at anything know to place their bets when the odds are in their favor, and reduce their risk when the odds are against them.

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