Stocks Break Down

For the past two months, stocks have tried to break above their previous highs. The S&P 500 had rallied to within 1% of its high-water mark but also was unable to break out.

Now the summer months have started to begin a traditionally challenging time for stocks. Economic and geopolitical news is starting to cause investors to rethink their equity positions.

We are sitting at the critical 2,080 level for the S&P 500 (SPX). If we fail to hold here, the next support level is the 200-day moving average of 2,015. A break of the 200-day moving average would place stocks back into a correction.

However, we have a number of positions that have improved during the past week. On the exchange-traded fund (ETF) side of our positions, they generally have improved closer to the flat line with ProShares UltraShort Bloomberg Crude Oil (SCO) in the green and ProShares UltraShort Gold Miners (GDXS) as the outlier. I will have more on GDXS in a moment.

On the options side, our SPDR S&P 500 ETF (SPY) call spread continues to decay. At the time of this writing, we are near break-even in both the PowerShares DB US Dollar Bullish ETF (UUP) and United States Oil ETF (USO) call options.

Long-term interest rates also have fallen these past few days, amid fears of a British exit from the European Union as recent polling has caused a flight to safety.

Last week, we picked up ProShares UltraShort 20+ Year Treasury (TBT) on our view that rates will reverse from these extraordinary low yields. So far, we are down slightly on the trade. We still are watching to pick up some put options on TLT if we see a spike higher.

With respect to ProShares UltraShort Gold Miners (GDXS), we believe it is time to take off the position. The original thesis for putting on and keeping the position involved overbought conditions and seasonality. The sell-off came, but it was a fairly shallow and quick move as gold prices tested the $1,200 level and bounced off. Traditionally, the months of May and June have proven to be soft months for gold. But as we trade halfway through June, this weakness has not materialized. We hate to see the position go at a loss. However, as seasoned traders know, sometimes all the data can point in a certain direction but it doesn’t translate into gains. When you receive this alert sell your GDXS position, which last traded at $4.99.