Update On Pairs Trade Post With Phelps Dodge And Newmont Mining

We are seeing the largest divergence in decades on Newmont Mining & Phelps Dodge and it has been accelerating over the past few months. I believe we are extremely close to an initiation point on my prior "pairs trade" post. So close that frankly if I were a very aggressive trader, I'd be building a position on my pairs trade right now. If it developed constructively, I'd scale further into the trade relatively quickly. It is highly likely we are close to setting up a major break in copper or a push significantly higher in gold or both. I would expect the reasons this trade is setting up are not a good sign for the global economy. The drivers could be one or many scenarios such as a significant global slow down, "abnormal" inflationary pressures as outlined in the October 16th post, "Why The Bulls Are Wrong. Why The Bears Are Wrong. And What Comes Next." or other yet to be revealed issues.

Here are the first few paragraphs from my pairs trading post along with the date it was posted if you missed it. The entire post is available in the site archives.

Sunday, August 20, 2006

Pairs Trading and Phelps Dodge

Finally! Here's my pairs trading post. I believe this strategy will soon make significant sense. It hasn't unfolded yet but sometimes markets don't oblige exactly when you want them to. First let's take a cursory look at pairs trading or more commonly called spread trading. Spread trading seems to have found its beginning in the futures market from all of my reading. I don't know who first developed such a strategy but Morgan Stanley takes some credit for birthing it. The concept involves finding two commodities or investments which are highly correlated. They can be positively correlated or negatively correlated. Doesn't matter. They can be seasonally correlated like heating oil and gasoline or they can be inflation oriented like copper and gold or they can be business cycle correlated like semiconductors and oil companies.

Spread trading is a tremendous opportunity to reduce risk while taking very aggressive positions. For equity investors, I guess something like covered calls or strangles or straddles or some other risk reducing strategy would likely resonate. Using stocks as opposed to futures contracts or options contracts is alot easier and cleaner. You don't have to decide which months to invest in, you don't need to hit the trade just perfectly, you don't have a time decay issue and a host full of other issues.

Per the comment, READ MY DISCLAIMER POSTED CLEARLY ON THE FRONT OF MY BLOG IN LARGE PRINT. I DO NOT GIVE INVESTMENT OR TRADING ADVICE. THE POST IS IN FIRST PERSON. ME. NOT YOU. I QUOTE "The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities." PER YOUR COMMENTS, THIS WILL NOW BE INCLUDED AT THE TOP OF EACH POST FROM THIS POINT FORWARD. THANKS .