Ride the Volatility Higher

Meanwhile, back at The Tinker Factory, I continue to ponder the catalysts which will drive the market lower, and boost volatility higher.

At the moment, I am positioned well as my previous insights into downside insurance (puts) in a handful of markets have proven astute. Soybeans and oil have been pummeled over the last couple of days, and the beating promises to continue. As it does, my store of energy—along with my credibility—will grow.

My favorite position in the short term are puts is Alcoa (AA) and calls in the ProShares UltraShort Basic Materials ETF (SMN). Alcoa announces earnings today, and they will disappoint. Everyone else will be surprised. How can I be so sure? Among other things, Citibank initiated the stock at a buy with a $14 price target on June 25th. This is an obvious sign that things don’t look good for the quarter. Second, The CEO came over the wires yesterday and declared that “global demand for aluminum is recovering;” that China is “clearly out of the woods;” and that “US and European demand has bottomed.” Ironically, such expectant declarations prior to one’s earnings are merely a bold tell—a tell that bad news is forthcoming.

In long overdue news, Goldman Sachs finds itself mired in controversy over some stolen code. Court documents stated that “The bank (Goldman ) has raised the possibility that there is a danger that somebody who knew how to use this program could use it to manipulate markets in unfair ways.” In other words, Goldman is worried that, without the code, they

will no longer be able to manipulate markets. Moreover, if another party has it, they may now interfere with Goldman’s special market mending abilities. This is a very important story to follow. As it gains attention, price movement in the banks could get wilder than they were last fall when Lehman suffered the fate of gambler’s ruin. This story is being covered very well over at Zero Hedge. Keep an eye on developments.

Approaching a full 360 and my original point, we are positioned for a swoon in many markets, and a jump in volatility. It is tough to pinpoint the precise catalyst, but we have at least identified some deserving nominees: the deflationary crash in commodities, the earnings fumble to be reported by Alcoa (AA) this afternoon, and the Goldman controversy. All are worthy candidates—you must cast your own vote. Like Sly Stone, I want to take you higher.