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Tuesday, August 12, 2014

Rio Alto pops: the dilemma of a disciplined investor


Damn, Rio Alto's taking off:


That's a breakout. We buy those, don't we?

Problem:


GDXJ's not breaking out.


GLD is maybe back into its seasonal uptrend after the customary midseason correction, but maybe not, but probably.



But the silver chart still sucks, and silver correlates with GDXJ.

What to do?

One the one hand, RIOM is better than your average GDXJ denizen, and Rio should be going up even with gold steady because they've derisked their future with the Sulliden buyout.

On the other hand, if gold becomes weak then RIOM can drop back down hard.

On the left foot, gold isn't supposed to be weak because Diwali's coming up.

On the right foot, are we sure the monsoon is okay yet?

I'd whip out my junk but that was another topic entirely.

So basically, if I'm a disciplined investor I don't buy RIOM on the breakout because the background is still cloudy... but a disciplined investor should also buy the breakout! What to do? What to do?

Answer: I already own a far-sized short vix position, and that might move as much as Rio, and the rest of my money is in S&P. So buying Rio adds to my risk profile unless I buy it with my short vix money, and that means dumping a short vix position that I bought at a great low which could return me 5-10% more in a week, easy.

So I only want to buy Rio here if I expect it to return more than a short vix position.

That's still not a sufficiently actionable answer, but at least it gives me a better sense of the problem.


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