• SDS     +6.51%
• DTO    +1.00%
• VXX    +9.72%

Remember these positions all represent net short market trades and are to be used only within an acceptable range of risk. These vehicles are all very volatile, so we highly recommend readers to subscribe to our “Complete DS Analysis” feed in the right sidebar and our DS SHOUTBOX trading notebook feed @http://twitter.com/ds_shoutbox. The DS SHOUTBOX will give readers notifications of any trades made after the close of each trading day, while real time trade alerts are only available to private clients.

If you are interested in becoming a private client, feel free to email our Lead Trader and Analyst Robert Eberenz at Robert.eberenz.iii@gmail.com.

VXX (iPath S&P 500 VIX Short-Term Futures ETN), 1-yr chart on 05-28-10

Trade: Short the S&P 500

Time Horizon: 5-20 Trading Sessions

For the first time in a LONG time it’s becoming safe to bring on short positions relative to the S&P 500 equity index. The S&P 500 p/e ratio adjusted for inflation remains above 20 @ 21.13 as of Friday’s S&P 500 close @ 1089, which suggests that the recent correction on the S&P has further to decline before it reaches fair value.

SDS (ProShares Ultra-Short ETF), 6-mo Chart on 05-28-10

While we don’t feel comfortable going long the S&P 500 at any p/e level above 15, given the trend of rising interest rates, we understand that risk takers will re-enter the market at higher current p/e valuations. So we’re recommending this play as a short term position (i.e. 1-4 weeks or until reaching our profit target). Using the ProShares Ultra Short S&P 500 ETF (SDS) we can get relatively liquid 2x inverse exposure to the S&P 500 (recently +50 million shares/day). While we’re looking to capitalize on instability and unresolved risks in the EU, trading the SDS will give traders short exposure to a basket of U.S. equities and avoid short term fluctuations  in similar vehicles tied directly to the EU.

Trade: Short Crude Oil

Time Horizon: 5-15 Trading Sessions

We made a call to short Crude at $79.69, calling a price target of $70 /brl for the WTI continuous spot price and we cashed out when the WTI price hit that level. After closing that position at a profit, our hunch was confirmed. The uptrend in inventories had fought the rumors of accelerating demand for gasoline and mediocre distillate consumption, and instead that macro-economic and geopolitical forces are now leading prices.

WTI Continuous Crude Spot, 1-Yr Chart on 05-28-10

You may notice that the MACD histogram would disagree with our position, however the flight from risk trade is back on and we are going against our technical instincts to put an opening stake into DTO at 75 bucks. We also have a buy trigger set at $80/shr which will give us short exposure when the WTI near month contract prices near the 50 day sma at $77.

The European Confidence report and the Chinese Industrial Purchase Managers survey have added to uninspiring anecdotes concerning bond market weakness in the U.S., Europe, and China, to reassure us of our bearish positions here.

Some readers will like none of these strategies, while others will find them all interesting at these levels. Remember to do your own research and by all means tell us why we are RIGHT or WRONG in the comment box below!

Just this week we have seen increasingly bearish signals for U.S. Treasury debt as a whole, especially long term obligations, as the 10 and 30 year note auctions have extended a short term pullback from record demand levels in the past months. Wednesday we saw the bid-to-cover ratio of the 10 Year Note auction fall sharply from the October high of 3.01 to 2.62, citing a decrease in demand for U.S. debt. On Thursday there were further red flags raised as the effective "high yield" during the 30-Year Treasury auction jumped to 4.52% despite the same coupon rate as the lower yielding November auction.

   
 
There will soon come a time where equities and government bonds perform inversely to one another, because in moderately frightening times U.S. debt is seen as a better alternative to cash. However the 10-year note has peaked and begun to fall as investors realize the hazards to investing in the long term credit of the United States. U.S. debt default is not a part of the question, yet the rating of the debt has been threatened by credit rating agencies Moody's and S&P, suggesting that holding the interest bearing notes for an extended period will cause one to lose money, as higher rates are assuredly ahead for a 0.01% Fed Funds targeting U.S. Central Bank.

Judge for yourself and take a look at the possibilities for the 10 Year treasury to fall further as the yield continues to rise. Nearly one month ago we endorsed this position as a medium term play on low interest rates and a hedge against U.S. equity shorts in our "Shorting the 10-Year Treasury" article. Below is a chart of the 10 Year Treasury yield which moves in tandem with such Treasury short funds as the TYO (Direxion 10-Year Treasury 3x Bear ETN).

While you may not have opened a Short 10-Year Treasury position when we first endorsed it on November 13, you have a new opportunity to see the yield rising with momentum, and have the luxury of waiting for the yield to pull back before making a short play. Remember, the yield goes up when the bond price drops, thus raking in gains for Treasury bear positions. Diamond Slice currently holds a minor position in the TYO ETN and plans to add to the position on pullbacks due to the bullish momentum and MACD averages showing bullish trends above zero.

Disclosure: Long TYO 

Since October 23, BVN has moved from $36.97 to the Friday December 4, 2009 closing price of $39.84, capturing a 7.8% gain. Continuous spot prices for gold are near 1145 this morning, while S&P 500 futures are also down 5 points at 1102, suggesting that BVN will open lower as the December 7, 2009 trading day begins.

We like the company for a long term investment strategy of 5 or more years at these prices, given their promising new La Zanja and Tantahuatay mines. La Zanja is set to come on line in early 2010 and is projected to put out 100,000 ounces of gold per year, while Tantahuatay will come on line in 2011 and should also tack on an additional 100,000 ounces of production. BVN does not hedge their gold prices, so any changes in the price of gold directly effect the bottom line of the firm. The firm is located in Peru, where labor is cheap and the currency is highly tied to the price of precious metals, making the firm an attractive company to own in a high U.S. inflationary environment.

All said we see a shifting sentiment concerning U.S. interest rate policy (markets are beginning to anticipate earlier than expected quantitative tightening by the Fed) and a separately high technical probability that global equities will pull back from current levels.

We suspect there will be a short term pullback of the stock along with the price of gold as the dollar strengthens temporarily, yet we endorse the company as a good investment for medium and long term investors.

Diamond Slice is acting on these signals and closing BVN positions for a profit. The stock will continue to be followed and any positions regarding the stock on our behalf will be fully disclosed to our readers.

DS Disclosure:

Buy SKF @ 84.50

Bank of America has gained 88% from the $3.00 buy point I recommended on Friday March 6, 2009. The stock is trading up 14% on the day at $5.64. I believe it has room to move upward, but it will most likely pull back some from here. Cash in on your handsome gains if you bought at or near $3.00/ share.

Look for a re-entry point near $4.00/share.