The skitzoid action of the markets the past couple of weeks has set up some fine opportunities.

Victor’s Trading Notes:

Market price action (across asset classes) has been skitzoid the past couple of weeks…up one day, down the next (and in some markets up and down within the same day!) as breaking news or central banker comments have buffeted prices…while competing views about the future, about what’s important and what isn’t, seem to be enthusiastically embraced one moment, and then thrown under the bus the next! Yikes!

For me the big question is about the USD. My good friend Jack Crooks (www.BlackSwanTrading.com) makes the case that there are 2 primary expectations competing in the FX market:

     1) the US Dollar is about to rally on rising yield spreads, as the leader of synchronized global growth, as the beneficiary of Trump tax cuts and a self-reinforcing flow of multinational cash repatriation and foreign direct investments and,
     2) the counter argument that the good USD news is priced in and any rallies will fade quickly as the rest of the world’s major central banks also start raising interest rates (narrowing interest rate spreads) and their strengthening economies attract capital flows away from America.

Since the Sept 8 Key Turn Date (KTD) I’ve looked for opportunities to buy USD against other currencies…but my risk management rules kick in if it falls. My favorite FX positioning since the KTD has been shorting CAD against USD and this week, with the choppy price action around comments from BoC Chief Poloz I was stopped for small losses when CAD rallied.

One of the hardest things to do when you get stopped for a loss is to put the position back on and that’s exactly what I did…so I started the week short CAD…got stopped out for a loss on the Poloz rally…and then I re-shorted it. If I had begun the week with no CAD position and was simply looking at the price action I’d have to say that CAD looked to be at risk of breaking down…and I’d sell it. I think CAD actually looks WORSE after this week’s “failed rally.” This week CAD had its lowest weekly close in nearly 6 months. I think it’s at risk of breaking through the lows of the past 2 months (around 7750 basis March) and if that happens it could fall to 75 cents or lower. I hope to have the “courage of my convictions” to add to my short position if it breaks to new lows.

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Crude oil also had wicked market action over the past month as prices seemingly surging higher one moment and then fell sharply the next. Like the 2 primary expectations competing in the FX markets noted above there seems to be 2 competing views in the crude market:

     1) The production cut back agreements made by OPEC-and-Allies has not only substantially reduced global inventories but demand is now running ahead of supply and prices will therefore continue to rally and,
     2) Rising prices (WTI rallied from ~$42 in June to ~$59 in November) have been the “best fertilizer” for increased production…American frackers have really ramped up their production…with expectations that total American production may increase by another 1 MBD in 2018. This view is that prices have already topped out around $59 and IF prices drop below $55 then the HUGE speculative bullish positioning in the “paper” oil market will start liquidating…thereby accelerating a price decline.

I have traded WTI almost exclusively from the short side since 2014 and therefore have a bearish bias towards crude. Unfortunately this bearish bias kept me from buying crude during the rally from $42 to $59 but at least I didn’t “step in front of the train!” I waited for what I thought was the “As Good As It Gets” moment following the Nov 30 OPEC meeting to come and go…waited for the market to hit a high ($59) , fall back, hit a lower high (a failed rally) before I sold it short around $58. The market broke to $56 but then rallied all the way back to $58.50 (the halted UK pipeline story) and stopped me out… turning a nice little unrealized gain into a nice little realized loss! Darn!

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I still think WTI looks toppy so I’ll watch for an opportunity to re-short it.

At the end of the week I’m short CAD and long Euro puts.

PI Financial Corp. is a Member of the Canadian Investor Protection Fund. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade or the authorize someone else to trade for you, you should be aware of the following. If you purchase a commodity option you may sustain a total loss of the premium and of all transaction costs. If you purchase or sell a commodity futures contract or sell a commodity option  or engage in off-exchange foreign currency trading you may sustain a total loss of the initial margin funds or security deposit and any additional fund that you deposit with your broker to establish or maintain your position.  You may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice, in order to maintain your position.  If you do not provide the requested funds within the prescribe time, your position may be liquidated at a loss, and you will be liable for any resulting deficit in your account. Under certain market conditions, you may find it difficult to impossible to liquidate a position. This is intended for distribution in those jurisdictions where PI Financial Corp. is registered as an advisor or a dealer in securities and/or futures and options. Any distribution or dissemination of this in any other jurisdiction is strictly prohibited. Past performance is not necessarily indicative of future results

Victor is sensing the complacency we’ve seen across the assert classes has changed. The Dow swung 400 points on two separate days and the Canadian dollar boomed on an unemployment number, indicating increasing volatility going forward.

….also from Michael: One of the Greats in the Business, Mark Leibovit Tells Us “What’s Next”

I have a longer term Pro-USD bias…perhaps because I’ve made money the past few years being short currencies against the USD…but right now I’m unsure what to do so I’ll stay out of the currency markets. Victor outlines opportunities in Gold, Crude Oil and the Stock Market

LIVE FROM THE TRADING DESK – NOV 18TH TRADING NOTES

Choppy price action in currencies: The September 8 Key Turn Date launched the US Dollar on a 2 month rally against most other currencies…the US Dollar Index rose 4.5%…but the past 2 weeks the price action was choppy with Euro, Yen and Gold all higher against the USD while AUD and NZD fell and CAD went  sideways. My core short term trading idea since the Sept Key Turn Date has been to be long USD but for the last 2 weeks I’ve been on the sidelines…unsure what to do.

Some analysts make the argument, and they may be right, that the recent 2 month USD rally was only a correction in the downtrend that started in January when the US Dollar Index was at 14 year highs. Interest rate premiums clearly favor the USD (at the 2 year point of the yield curve the USA is premium Germany by 242bps., premium Japan by 192bps.) but those premiums have not deterred a good rally in Euro and Yen the past 2 weeks. The ECB says the Euro area needs continuing monetary stimulus while the Fed says they will be “taking back” previous stimulus and raising rates…while the BOJ remains “peddle to the metal”…but still the USD looks wobbly.

Perhaps the USD is weighed down by “political uncertainty” in Washington relative to the “political certainty” (don’t laugh!) of the Euro zone.

Other analysts make the argument, and they may be right, that the recent 2 week decline in the USD is but a brief correction in the early stages of a developing USD rally.

I’m aware that I have a longer term Pro-USD bias…perhaps because I’ve made money the past few years being short currencies against the USD…but right now I’m unsure what to do so I’ll stay out of the currency markets.

Gold: I bought gold this morning. A small position, and I’ll be gone if it falls back below yesterday’s close, but today’s price action looks good. I’ve noticed that YTD trading volume in the gold futures market is already higher than any previous year…and there’s still 6 weeks to go in 2017. That seems counter-intuitive given the sideways price action we’ve seen in gold while open interest remains well below last year’s levels. It’s as though gold has been “churning” below the surface…just waiting for a breakout one way or the other.

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WTI: I’ve been out of the crude market for the past 2 months or so…waiting for an opportunity to get short. I’ve missed a great opportunity to trade the market from the long side because I’ve got a bearish bias…likely due to the fact that I’ve made money the past few years being short crude! Anyway, I waited and waited while the market rallied…apparently embracing the story that the cut back agreements by OPEC and some non-OPEC countries were not only “doing the job” but would be extended at the OPEC Nov 30 meeting. The “political uncertainty” in Saudi Arabia seemed to provide the “cherry on top” of hugely bullish sentiment and WTI rose to $58. I decided that this was “As good as it gets,” for WTI and got short. Prices fell $2 but then turned around and began to rally. I covered and went flat.

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The stock market: last week and again this week the stock market looked “jittery” at different times but the major indices continued to rally back from the dips. I’ve been thinking that the market was “cruising for a bruising”…waiting for a chance to trade it from the short side. But to no avail, and, in what may be the kiss of death for the bull market, I bought the S+P! This is a pure price-action trade and not a vote of confidence…if the market doesn’t make new highs in a hurry I’ll be gone!   

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The $450 million da Vinci painting: Drew pointed out that this was a fantastic example of “not wanting to be in cash.” And maybe that’s the simple answer as to why the stock market keeps going up. People just don’t want to hold cash…not only that, but they’re willing to go deeper into debt to buy stuff. The central bankers must be smiling!

PI Financial Corp. is a Member of the Canadian Investor Protection Fund. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade or the authorize someone else to trade for you, you should be aware of the following. If you purchase a commodity option you may sustain a total loss of the premium and of all transaction costs. If you purchase or sell a commodity futures contract or sell a commodity option  or engage in off-exchange foreign currency trading you may sustain a total loss of the initial margin funds or security deposit and any additional fund that you deposit with your broker to establish or maintain your position.  You may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice, in order to maintain your position.  If you do not provide the requested funds within the prescribe time, your position may be liquidated at a loss, and you will be liable for any resulting deficit in your account. Under certain market conditions, you may find it difficult to impossible to liquidate a position. This is intended for distribution in those jurisdictions where PI Financial Corp. is registered as an advisor or a dealer in securities and/or futures and options. Any distribution or dissemination of this in any other jurisdiction is strictly prohibited. Past performance is not necessarily indicative of future results.

Last weekend it was easy to imagine that markets would be volatile this week: President Trump was set to nominate a new Fed Chairman, tax reform plans were to be unveiled, the Fed and the BOE were meeting, the post-hurricane employment reports were due, stock markets had raced to new All Time Highs…what could possibly go wrong?

Not much, apparently, as implied volatility fell back this week to near All Time Lows across asset classes…currency markets muddled mostly sideways with the US Dollar Index inching to its strongest weekly close since July…bond yields fell as the market reversed from pricing in a possibly tighter Fed…and stocks ambled to new All Time Highs!

Fed Chair: The President nominated Powell to replace Yellen when her term expires in February and the Senate is expected to approve his nomination. He provides continuity with recent Fed policies (better the devil you know…) but also showcases that Trump remains intent on “shaking things up.”

Tax Reform: There was very little reaction to the tax reform details across major stock indices, currencies and interest rates. There was, of course, a tsunami of politically motivated commentary about how bad or how good the proposals were, and whether or not the proposals will ever become law.

The Fed meeting: wasn’t expected to provide any fireworks, and didn’t. They see “solid” US economic growth and markets are now pricing a 90% chance that the Fed will raise short term interest rates by ¼ in December…and with financial conditions the “easiest” in over 2 decades the Fed may be tightening more in 2018 than the market is currently pricing…which would be USD bullish.

The employment report: was expected to show a big, possibly huge, post-hurricane employment rebound…but the net market effect of the report was subdued. Jobless claims fell to a 44 year low.

Consumer confidence: reports this week showed that American consumer confidence is at a 15 year high due to gains in the stock market, housing prices and wages(?) Consumers are now 70% of US GDP so their high confidence level may have a positive feedback effect on the stock market and housing prices…although I have to wonder if this isn’t a classic “end of cycle” picture especially with consumers running down their savings and going deeper into debt so that they can keep buying things! Another cautionary sign is that the growth rate for national wages is about half the growth rate for national housing prices.

The Canadian Dollar: One of the primary drivers of CAD-USD since May has been the 2 year interest rate spread. At the May CAD lows the spread was 65 points in favor of the USD, at the Sept 8 Key Turn Date the spread was 25 points in favor of CAD. Since early September the spread has gradually gone in favor of the USD and for the past week or so has hovered around 20 points premium USD. The 180 degree pivot by the Bank of Canada in early June, and the subsequent “backing away” by the BOC in September obviously influenced the interest rate spread and thus the FX rate. BOC Governor Poloz spoke before Parliament this week and maintained a “worried” tone. The correlation between CAD and WTI, which has been important for much of the past couple of years has been practically non-existent the past few months.

WTI: following the OPEC production cutback agreements in November 2016 and the OPEC/Non-OPEC agreements in December 2016, front month WTI topped out around $55 in January and February 2017 (I wrote that the crude oil bullish news had reached “As Good As it Gets” back then) and WTI began a stair-step decline to $42 in June. Since that June low market sentiment swung to believing that the cutback agreements have indeed reduced global supply below global demand, thus shrinking the inventory overhang, and prices have risen…with WTI closing above $55 this week for the first time in over 2 years. Rumors that the agreements will be extended when OPEC meets on November 30 have helped fuel the rally. It’s interesting that crude oil has rallied over 15% since early September even as the USD has risen against nearly all currencies. Crude oil, in other words, is rallying in terms of all currencies…a hallmark of a strong bull market.

My short term trading: My current core trading idea is that the USD made an important turn higher on September 8 after falling about 12% from a 14 year high in January. All of my trading since early September has been based on this core idea. CAD: I got short the week following September 8 and essentially stayed short until last week when I went flat. CAD had dropped over 5 cents and I felt it was due for a bounce. I re-established an initial short position when CAD rallied on Friday’s stronger-than-expected Canadian employment report. Euro: I had established short Euro positions in mid-October on the expectation that it would fall through the neckline of the head-and-shoulders pattern that had begun in late July. I covered some of that trade last week and the balance this past Monday. I bought the US Dollar index this morning following the employment report. WTI: I have traded WTI almost exclusively from the short side for the past 3 years but have been on the sidelines for the past couple of months.

PI Financial Corp. is a Member of the Canadian Investor Protection Fund. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade or the authorize someone else to trade for you, you should be aware of the following. If you purchase a commodity option you may sustain a total loss of the premium and of all transaction costs. If you purchase or sell a commodity futures contract or sell a commodity option  or engage in off-exchange foreign currency trading you may sustain a total loss of the initial margin funds or security deposit and any additional fund that you deposit with your broker to establish or maintain your position.  You may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice, in order to maintain your position.  If you do not provide the requested funds within the prescribe time, your position may be liquidated at a loss, and you will be liable for any resulting deficit in your account. Under certain market conditions, you may find it difficult to impossible to liquidate a position. This is intended for distribution in those jurisdictions where PI Financial Corp. is registered as an advisor or a dealer in securities and/or futures and options. Any distribution or dissemination of this in any other jurisdiction is strictly prohibited. Past performance is not necessarily indicative of future results.

The US Dollar rally: accelerated this week. I’ve been short other currencies against the USD since early September and took partial profits this week even thought I think the USD rally has more to go.

Diverging monetary policy: between the USA and other countries has been a key FX driver. On the September 8 Key Turn Date the 10 year treasury yield was at its lowest level since Trump’s election…but since then it has rallied to 5 month highs. Real yields have also been rising. The 2 year Treasury yield is at a 9 year high. Part of the reason for rising American interest rates (and a rising USD) is that traders are positioning for a more hawkish Fed. US Financial conditions are the easiest in 20 years…paving the way for the Fed to keep tightening.

Fed Chair: Fed Governor Powell is the front runner to replace Yellen but Trump might surprise markets and nominate both a Chair and Vice-Chair (Powell and Taylor?)

Tax cuts: Stock markets, interest rates and the USD have been rising in anticipation of Trump’s tax reform plans.

Euro: EURUSD hit a 2 ½ year high at 1.2150 on September 8 and has fallen about 5% since then as a result of 1) diverging monetary policy (ECB maintains accommodative policies while the Fed tightens,)  2) Political concerns (where Catalonia goes others are likely to follow) and, 3) unwinding of huge speculative long EURUSD positions.

CAD: Hit a 2 ¼ year high at 83 cents on Sept 8 (after the second Bank of Canada interest rate increase on Sept 6) and has fallen about 5 ½ cents since then as a result of 1) diverging monetary policy (markets anticipate that BOC will “pull back” after having gone “too far too fast” while the Fed continues to tighten, 2) Political/economic concerns (Trump may scrap NAFTA, Canadian economy softening after interest rate increases and huge CAD rally) and 3) unwinding of long speculative CADUSD positions which had reached multiyear highs by early September…and then got even bigger as CAD fell!

USD universally strong:   USD has been rising against nearly all currencies and gold since that very important Sept 8 date: the USDX is up ~4.5%, AUD is down ~6%, NZD is down ~6%, MEX is down ~7%, YEN is down ~5%, and gold is down ~$100 or 7%.

Stock markets: American markets keep making new highs (with any dip seen as a buying opportunity.) Tax reform has a number of “positives” for American companies including repatriation of overseas money…which could be used for share buy backs. It’s interesting to watch the TSE march steadily higher since Sept 8 as the CAD has fallen…to see that the German DAX has rallied sharply to New All Time Highs this week as the Euro fell…similar to how the British stock market rallied last year when the pound fell following the Brexit vote.

WTI: the front month contract traded to $54 this week, its best in 8 months, up $12 (28%) from the June lows. It’s interesting to see crude oil rally while the USD is rallying as market psychology embraces the bullish WTI narratives (Saudi “we will do whatever it takes”) while ignoring the bearish ones! I have traded WTI mostly from the short side the past 3 years but have been basically aside the past couple of months.

China congress: the congress is over, Xi has consolidated his power. Two weeks ago I suggested that there was probably a lot of “managing” of the news before and during the congress to avoid any embarrassment and I wondered what could “bust loose” once the congress was over. Maybe the 10 cent decline in copper Friday after hitting a 3 year high last week is one of those “bust loose” things. I think China is the world leader in the volume of copper traded.  

How to understand currency trading: I’ve been trading currencies for 40 years and one of my favorite chestnuts is that currency trends run WAY further than seems to make any sense, and then turn on a dime and go the other way.  I think the Sept 8 Key Turn Date was one of those “turn on a dime” dates.

PI Financial Corp. is a Member of the Canadian Investor Protection Fund. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade or the authorize someone else to trade for you, you should be aware of the following. If you purchase a commodity option you may sustain a total loss of the premium and of all transaction costs. If you purchase or sell a commodity futures contract or sell a commodity option  or engage in off-exchange foreign currency trading you may sustain a total loss of the initial margin funds or security deposit and any additional fund that you deposit with your broker to establish or maintain your position.  You may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice, in order to maintain your position.  If you do not provide the requested funds within the prescribe time, your position may be liquidated at a loss, and you will be liable for any resulting deficit in your account. Under certain market conditions, you may find it difficult to impossible to liquidate a position. This is intended for distribution in those jurisdictions where PI Financial Corp. is registered as an advisor or a dealer in securities and/or futures and options. Any distribution or dissemination of this in any other jurisdiction is strictly prohibited. Past performance is not necessarily indicative of future results.