Is a Sell-off Coming? One Mystery Investor Thinks So

US equities came out of the gates running last week by starting with a firm rally across the board on Monday. The S&P 500, Nasdaq 100, and Dow Jones Industrial Average were all largely in the green as the tech sector gained substantially. Most of the gains were driven by the largest company in the world by market capitalization, Apple, as the computer giant announced plans to develop an augmented reality app that enables consumers to virtually test furniture from home before they make a purchase.

Evidently, the news was enough to excite investors and the S&P 500 hit a fresh all-time high during Monday’s trading. Nevertheless, stocks managed to give back some of their gains later in the week with softer than expected economic data and weak crude oil prices.

However, slight weakness in domestic equities was drastically overshadowed by weakness overseas. The benchmark FTSE 100 index finished in the red for four straight sessions ending last week with a loss of 0.50%. Overall, the index has fallen for three consecutive weeks, which is the longest stretch of losses for the index in a year.

Essentially, much of the weakness in global stocks can be attributed to the relentless dive in the price of crude oil. Crude oil prices directly affect both European and US energy companies.

“The enormous volatility in the oil market is unsettling investors around the world. The fear of falling inflation and reduced growth prospects is at the forefront of traders' minds. It is not unusual for us to witness rallies, but the big picture is that oil has been falling since March, and now the selloffs are becoming even more severe,” said CMC Markets analyst David Madden in a note to clients.

Because the energy industry represents a significant portion of bedrock companies in the US and Europe, it’s difficult to have rallies when the entire sector has plummeted 15% YTD.

The plunge in oil prices even has some traders wondering if it will alter the Federal Reserve’s rate-hike agenda. But a fixed income strategist for BMO Capital Markets noted how “the Fed doesn't respond to it much because oil is so volatile.”

At this point, it’s unclear if oil inventories will continue to rise and prices will continue to fall, despite OPEC’s concerted efforts. If prices continue to slide, it’s not unreasonable to see further weakness in markets around the world.

Along those lines, one mysterious investor is particularly bearish in the next couple of months. On Tuesday of last week, an unknown investor purchased $3.8 million worth of VIX call options. The large trade of 74,300 contracts had everyone on the Street buzzing, because the trade will only pay off if there is a stark decline in asset prices and a huge pop in volatility.

Basically, there will need to be somewhat of a stock market crash between now and mid-August when the options are set to expire. Otherwise, the options will expire out-of-the-money and be completely worthless and the $3.8 million will be fully lost.

Because of the large size of this trade, many investors are wondering if the mysterious buyer of volatility knows something that other people don’t. Regardless, if there is a large increase in volatility and the VIX due to an unexpected market plunge, gold arguably stands to benefit just as much as the call options, if not more. And, unlike the calls purchased last week, gold won’t expire worthless if nothing happens in the next two months.

Therefore, gold truly is one of the better investment vehicles of this generation, because it serves as a prudent investment and a hedge against a market catastrophe.

 

For over 40 years, Blanchard and Company has helped over 450,000 clients invest wisely in precious metals and rare coins. Call us today at 800-880-4653.

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