An Interesting Week

In my last post I suggested a pairs trade including SKF and DGP. Since that post, DGP has fallen 3%, and SKF has risen 10%, netting a handsome 7% in the last 4 days. While I firmly believe in the soundness of the fundamental logic (a move to hard assets over paper assets due to credit worries), the technical picture doesn’t look good in the short term. Precious metals have found resistance at the nice round numbers, Gold just short of 1000, Silver ~20. Moreover, oil prices rose to a record high on Friday, but fell on high volume, signaling a short term turning point. Energy stocks in the OIH failed to make a new high in spite of crude oil’s advance, and it showed great weakness on Friday, along with miners. More importantly, SKF closed down 1% on triple the average daily volume after reaching a new high. The last time this happened was ~the January 22nd lows, which leads me to believe that there will be a strong counter trend in the coming week. The market may continue lower, but unlike the last few weeks, it seems like energy is leading the way lower. There may even be a short squeeze in real estate, finance, consumer discretionary. If Asia can recover, then there will be strength in energy and commodities, but if China continues to swoon, then I suspect there will be further price pressure in the near term. Perhaps the new pairs trade is UYG (double long banks) and SMN (double short basic materials). Hard to tell without my charts spitting out new numbers. In any event, keep your hard hats on, I suspect we’re in for increasing volatility and a VIX in the mid 30’s.