Is Your Spread A Simple Directional Bet?

Even when you balance your longs and shorts, your trade can still be a directional bet on the market.  Some have suggested that the $GDX$GLD spread I’ve been talking about ad nauseum is one such trade.  The premise being that $GDX will trade with the S&P 500 and $GLD will do whatever it wants.

Below is a chart of the $GDX$GLD spread overlaid with the S&P 500 Index in blue.  As you can see, sometimes they trade together and sometimes they don’t.  We can confirm this observation from a more analytical standpoint as I calculated the correlation of the spread with the broad market to be 0.298.

The bottom line is that this spread can mean revert regardless of what the overall market does.  That said, I did lighten up my $GDX long side of the spread as the market does look weak in general and I needed to adjust the portfolio overall.


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