Travel to Financial Success

Note that investors should judge political decisions based on constraints, rather than on preferences . Constraints always determine the action . [7] Figure 1.  Global Grain Trade The current geopolitical conflict in Ukraine spells bad news not just for Ukrainians but for the outlook for investors, too.   Over the weekend, the US and western allies said: [3] They will place sanctions on Russia’s central bank and remove some of the country’s lenders from the Swift global financial messaging system, in their harshest response yet to the invasion of Ukraine. Sanctioning the Central Bank of Russia could prove devastating — the true "nuclear" option in the West's financial arsenal. Russia currently holds about $640 billion in reserves. About 32% held in euros, 22% in gold, 16% in dollars, and 13% in Yuan. As Elina Ribakova , deputy chief economist for the Institute of International Finance, said:   Sanctioning Russia’s central bank is likely to have a dramatic eff...

Figure 1.  $SPX Bullish % Index on 02/25/2022 (thrust: > 75% and washout: < 25%; Source @mark_ungewitter ) Mark Ungewitter has posted the below comments on $BPSPX (i.e., S&P 500 Bullish Percent Index) on Twitter (See Figure 1): $SPX still lacking breadth washout , defined by BPI <25%.   Figure 2.  Similar chart (Courtesy of stockcharts.com )   It is also interesting to see that  @MrBlonde_macro has posted the below analog chart (2022 vs 2018) which also says that the real bottom of market probably is not in yet.  So, it's worth monitoring. Figure 2.  Analog of stock markets of 2022 vs 2018 (Source: @mrblonde_macro )

 Real Interest Rate The real rate is the return after inflation—generally regarded as the 10-year Treasury minus the CPI . Why do the real interest rates matter for gold?  Here are the reasons: [1] Holding cost Includes storage and insurance of gold Opportunity cost Instead of holding gold, investors could be lending it (or the cash spent) out. The higher the real interest rates, the larger are the opportunity costs of investing in gold . And the lower real interest rates, the smaller are the opportunity costs, so people are more eager to hold more gold.  In particular, the negative real interest rates are gold's real friends (the 1970s or the post-Lehman era are the best examples).   Figure 1.  Gold and real-yields (inverted) have decoupled from their historic relationship (Courtesy of stockchart.com ; 02/16/2022) Gold—a Geopolitical Hedge of Last Resort However, historically gold tends to increase during rate hike periods when gold’s negative c...

In 2021, $SPX options make up 16% of the $SPX market cap .  To hedge a book of $SPX options, the primary risk-management technique is delta hedging , which is when option traders start messing about in the equity markets.   Some may recall the Gamestop ( $GME ) saga that took place earlier this year - Much of this bizarre and explosive move was attributed to Gamma Exposure (GEX), which was a prime example of how the mechanics of gamma exposure can influence market action in a very powerful way.   Chart 1.  Estimated SPX Dealer Gamma Exposure - All Expirations (Source: @t1alpha ) Option Greeks   An option's price can be influenced by a number of factors that can either help or hurt traders depending on the type of positions they have taken. [1] Successful traders understand the factors that influence options pricing , which include the so-called " Greeks "— a set of risk measures so named after the Greek letters that denote them, which indicate how sensiti...

Commodities are frequently more volatile than stocks . They were are often subject to gaps and limit moves, which occur when a commodity opens up or down its maximum allowed move for the session. As shown in the below chart, @SuburbanDrone has chosen Average True Range (ATR) to represent WTI Crude Oil's volatility. In this article, we will cover the basics of ATR . (or Realized Volatility used in commodities market). Chart 1.   WTI Crude Price shown with Realized Volatility (or ATR ; Source: @SuburbanDrone ) Average True Range (ATR)   Average True Range (ATR) is an indicator that measures volatility .  It was developed by J. Welles Wilder who designed ATR with commodities and daily prices in mind . [1] A volatility formula based only on the high-low range would fail to capture volatility from gap or limit moves. Wilder created Average True Range to capture this “missing” volatility. ATR Values Are Not Comparable   ATR is based on the True Range, which uses ...

Figure 1.   Tech and Housing Bubbles in One Chart (Source: @SuburbanDrone )   Footnotes of Figure 1 @Home Case Shiller Home Price Index (via Fred) $SPT S&P 500 Information Technology Sector Index INDX !RYRATMM  Rydex Asset Ratio—Bear + MM Assets/Bull Assets (NBD) INDX $ONE:!RYRATMM (or Inverse of !RYRATMM ) Rydex bull/bear asset ratio