COVID-19 still being an issue in the US has had an effect on the economy's ability to recover
In order to position portfolios to profit from the S&P and an economy at risk, maintain a defensive posture using HYG, SPDR S&P 500 Trust ETF (SPY), SPDR S&P Metals & Mining ETF (XME) puts and SPDR Gold Shares (GLD) calls as COVID-19 related impacts are flattening the economic recovery expectations more than the COVID-19 case load in the US. Invesco CurrencyShares Euro Trust (FXE) also looks to be benefiting from a flatter COVID-19 curve than the US with its flare ups.
The Fed made more explicit its corporate bond buying but the difference between liquidity and solvency still needs to be bridged. With iShares Barclays 20+ Yefr Treasury Bond (TLT) and GLD up for the month of June about 1 and 2% respectively, our measure of risk aversion, EABCDI, has moved to flat on the month and CBOE implied Correlation and the VIX have moved up ~13% and 26%.
There’s also been noted volatility and correlation concerning signals early in the month. In addition to these technical signals there has been discussion that some of the stimulus has had a harder time finding its way into consumers hands because of administrative issues and a subtle change in bank credit standards. There is a risk here that the hope in the more optimistic earnings recovery of the second half may have to be downgraded and the impact across more highly correlated portfolios hit hard.
SPDR S&P 500 Trust ETF (SPY), iShares iBoxx $ High Yield Corporate Bond ETF (HYG), and SPDR S&P Metals & Mining ETF (XME)
Defensive structures of SPY, HYG, and XME all look interesting as the underlying indices look vulnerable. Strategies may have to target August and September with spreads to keep costs in line. With the Fed willing to backstop so well, downside may be limited to 2 standard deviations but why risk losing 10% on the S&P or 7% HYG from here?
XME looks particularly interesting with the sharp recovery since 3/23 counting on a major Chinese supply impetus. It looks to me like demand may not regain enough strength to warrant that move and the recent breather of copper and steel is giving the signal XME could be vulnerable. XME 2m IV is in its 81st percentile and fair to forecast. 2m Skew is 1.26 standard deviations over its mean showing options investors are concerned.
SPDR Gold Shares (GLD)
GLD longs look advantaged, as are selling iShares Silver Trust (SLV) higher volatility call spreads to buy GLD calls. We recommend a 2 to 1 contract notional ratio (remember each GLD contract is a bit greater than 10 times more underlying capital than each SLV contract) on the GLD to sold SLV spreads and think the roll-over of economic expectations will leave SLV more vulnerable than anticipated. SLV 2m IV is in its 72nd percentile and 18% expensive to forecast. 2m Skew is 0.68 standard deviations over its mean. GLD 2m IV is in its 76th percentile and 39% expensive to forecast. 2m Skew is 1.28 standard deviations over its mean.
Something to keep an eye on
FXE looks to have gained momentum from the odd place of better European COVID-19 reopening performance of late. If that plays out, a weaker dollar advantages GLD and hurts iShares MSCI Emerging Markets Index (EEM). A US trade war with China and any reduction of US purchasing power hurts the top lines of EEM companies.
