Trading Desk Notes For June 18, 2022

Central Banks dominated the markets this week

The Fed raised rates by 75bps and forecasts much more to come. The Swiss National Bank surprised markets with a 50bps raise (to minus 25bps), the BoE raised 25bps, the ECB indicated that they would likely raise by more than 25bps in July, and the BoJ stood pat. The Bank of Canada is expected to raise by 50-75bps on July 13.

Short-term price action this week in stock, credit, currency and commodity markets was wickedly choppy. The S+P is down ~24% YTD, the Dow is down ~19%, and the Vanguard Total Stock Market ETF is down ~25%.

The BIG questions about Central Banks

Have Central Banks entered a new (Volker-like) era after more than two decades of throwing money around? Is their resolve to “bring down inflation” strong enough to keep raising rates (and otherwise tighten monetary policy) as “stuff” breaks? Will they continue raising rates into a recession? If they have found “religion,” what will cause them to “back off”? (A stock market down 50%? A crash in real estate prices? Soaring credit spreads? Sharply higher unemployment rates?) Given that they were woefully late in abandoning their “transitory” views, will their timing be any better when markets cry “Uncle?”

The BIG questions for markets

Are Central Banks the driving force in markets or only the catalyst for an overdue “shakeout?” If Central Banks have found “religion,” does that mean that most of the metrics (especially valuation metrics) that have worked over the past two decades are now worse than useless? If Central Banks have entered a “new era” (think of Fed Chair William Martin and his notion of “taking away the punch bowl…”) will people (retail and institutional) who bought into Passive Investing start selling?

Has a recession already started?

It all depends on your time frame

For short-term traders, the cacophony of negative wailing is a temptation to BUY. For longer-term investors, the markdown in various assets has been a sobering reminder that they were not nearly as rich as they thought. Reality (Mister Market) is catching up to unsustainability (over-leveraged speculative excesses), and TINA has gone out of style.


The major indices have round-tripped to just above where they were when Biden’s election and the Pfizer vaccine announcement in November 2020 ignited the run-for-the-roses final rally in the 12-year bull market.

More speculative issues have had a more dramatic rise and fall.

The S+P futures fell ~13% (top to bottom) in the ten trading days from June 3 to June 16. This sharp decline has only happened on three different occasions in the last eleven years, and each time it was followed by a substantial rally. (But if we are in a new era of Central Bank behaviour, past performance is no guide to future performance.)


The US 10-Year TNote briefly traded at a record low 0.50% yield in August 2020. This week it briefly traded at a 3.5% yield, an eleven-year high.

High-yield corporate bond prices have tumbled YTD. If this week’s closing level holds until month-end, it would be the lowest monthly close since the grim days of March 2009.

Forward Eurodollar futures contracts are pricing a sharp rise in short-term interest rates between now and March 2023, followed by a modest decrease. (these contracts trade at a discount to par – falling prices mean rising interest rates.)

Canadian Bankers Acceptance futures contracts are pricing a similar trajectory.


The US Dollar Index made a 20-year high this week, up ~18% from what I had frequently described as an “inflection point” on January 6, 2021, when the Capital Building in Washington, DC, was under siege. (Think of Rothchild’s quote about buying when blood runs in the streets.)

Short-term volatility in the currency markets has been wicked over the past six weeks.


The bullish fossil fuels narrative (supply shortages) has been convincing, and capital has flowed into the “energy” markets – but what about demand? So far, “demand destruction” doesn’t appear to have happened, but markets discount the future, and the message coming from equity and credit markets may spark at least a correction in energy prices.

Gold has chopped sideways within a $75 range for the past six weeks as speculative interest continues to wane. A surging US Dollar and rising real interest rates are typically toxic for gold, so perhaps gold should be credited for “holding its own” lately.

The broad commodity indices (with a heavy energy weighting) may have created a bearish chart pattern: a failed breakout above recent resistance levels (~785) and a “lower high” (at 825) relative to the spike high in early March.

My short-term trading

A few months ago, I asked the rhetorical question: “Will the Fed throw the stock market under the bus in their quest to bring down inflation.” So far, the answer is “Yes.”

I bought the S+P four times this week, looking for a bounce. I traded small positions and used tight stops, but the net loss to my P+L was ~0.5%. On Wednesday, Fed day, I was ahead by 100 points at the high of the day, and if I had taken profits, then I would have had a 0.5% gain for the week instead of a loss. I decided to stay with the trade because I thought the market could rally (it had traded at an 18-month low the day before.)

In retrospect (!) I broke my new “rule” about taking quick profits in a counter-trend trade (and “staying with” trades that were in line with the prevailing trend.)

I bought the Euro on Thursday, looking for it to break above the previous highs for the week (~1.0579.) It did, soaring about 100 points above my entry price. (I bought the Euro because it was rallying despite Europe being neck-deep in negative sentiment.)

Once again, I decided to stay with the trade, rather than take quick profits. There was double bottom (mid-May and mid-June) on the charts, and a break above the 1.07 support/resistance line could ignite a big rally. I raised my stop to limit losses, and it was elected on Friday, resulting in a P+L loss of 0.15%.

I sold OTM short-dated (one week) TNote puts on Monday, thinking that bonds were egregiously over-sold. VOL was near record highs. I covered the position later in the day for a P+L loss of 0.20%.

I re-entered the trade on Thursday when TNotes rebounded from the week’s lows (made on three consecutive days.) I’ve held that position into the weekend.

I added (cautiously) to my bullish TNotes trade on Friday by buying futures and writing short-dated OTM calls, and I’ve held the positions into the weekend. My net unrealized P+L on the TNote trades is ~+0.20%, and my net account P+L is down ~0.65% for the week.

On my radar

Markets feel like they are at a “make or break” point.

As noted in the Equities section above, the S+P has only dropped >12% in ten days on three occasions since 2011, and it rebounded, big time, after each of those events. But if this is a “new Fed era,” the selling pressure may continue.

I think the market is pricing the Fed to tighten into a recession, which may already be dawning, and the economic slowdown will deepen quickly.

My “economic analysis” is only a background to my price action-driven trading decisions – but if price action is harmonious with my economic analysis, I’ll be inclined to “stay with” winning trades rather than take quick profits.

Thoughts on trading and risk management

I watched a fantastic video on Realvision TV this week with Mark Ritchie interviewing my friend, Peter Brandt.

Peter is my kind of trader in that he never “swings for the fences.” He believes that Job #1 for traders is to: Protect Capital. He sees trading as a job and is trying to build cash flow, not pick big winners.

Peter sees himself as a risk manager, not a trader. (Picture a prop trading firm. A bunch of traders are sitting in front of their screens, trying to make money by taking market risks. Behind them sits the risk manager. His job is to see that none of the traders blow up the firm. If a trader loses too much money, he gets a tap on the shoulder from the risk manager. Think of your account as a prop firm and yourself as the risk manager. Protect your capital.)

After keeping records of his trading for 40+ years, Peter discovered that 80% of his trading profits came from less than 20% of his trades. The profits on these trades were substantially more significant than the profits or losses on the other 80% of his trades. His “risk manager” job is to make sure that the other 80% of his trades don’t eat into the profits made by the 20%.

He is a technical “breakout” trader with a swing trading time horizon – a few days to a few weeks. He has also found that almost all of the trades that contributed to 80% of his profits started working immediately. (He put on the trade, and it immediately started making money.) Peter realized that it was essential to develop rules that allowed him to “stay with” a winning trade – to give it a chance to be one of the big winners that constituted 20% of his trades.

RealVision TV: I was a founding subscriber to RTV and also subscribed to some of their more expensive services. I interviewed Raoul on Moneytalks radio (Canada’s most popular financial talk show) and strongly recommended listeners subscribe to RTV. I was dismayed, however, when Raoul publicly declared to his audience (primarily millennials, I believe) that he was “irresponsibly long” crypto. I thought he was “irresponsible” to do that, given his “guru” status with his relatively unsophisticated audience.

I cancelled my RTV subscription but later re-subscribed. They have great interviews with excellent analysts and traders, and I tune out their relentless crypto bullishness.

The Barney report

Barney became part of our family in early November last year when he was eight weeks old. He grew like a weed for the next several months but seems to have levelled out around 60 pounds over the last six weeks. He used to gulp down his food but lately, he will eat some of it and, maybe, come back later and do a cleanup.

He loves to get outside and explore, and we always look for new places to take him. Recently I started taking him to a meadow (about 40 acres in size) with trails through tall grass. He loves it, and we play lots of hide-and-seek games in the tall grass.

A request

If you like reading the Trading Desk Notes, please forward a copy or a link to a friend. Also, I genuinely welcome your comments, and please let me know if you’d like to see something new in the TD Notes.

Listen to Victor talk about markets

I’ve had a regular weekly spot on Mike Campbell’s extremely popular Moneytalks show for >22 years. The June 18 podcast is available at: https://mikesmoneytalks.ca.

You can listen to my 30-minute June 11 “This Week In Money” interview with Jim Goddard. Marc Faber and Ross Clark are also on that week’s podcast.

Victor Adair retired from the Canadian brokerage business in 2020 after 44 years and is no longer licensed to provide investment advice. Nothing on this website is investment advice for anyone about anything.

Trading Desk Notes For June 11, 2022

Markets expect Central Banks to become more aggressive – stocks tumble, while interest rates and the US Dollar surge higher

The ECB finally “grasped the nettle” on Thursday, but their announced intentions (to raise interest rates by 0.25% next month and to also stop buying bonds) were tepid relative to soaring inflation, so the Euro fell sharply Vs. the USD, interest rates jumped, and sovereign spreads widened dramatically.

On Friday, the CPI report was hotter than expected, and consumer sentiment plunged to a record low. Interest rates surged higher, credit quality spreads widened, and the US Dollar soared while stocks tumbled.

Consumer spending is ~70% of American GDP. Consumers are more worried about inflation than anything else. Previously, inflation was mostly confined to financial assets and real estate, but now inflation is hitting consumer necessities like food, fuel and electricity. Consumer spending has been holding up, but consumer debt is rising sharply.

I expect consumer spending to fall sharply as Central Banks raise interest rates. The economy will slow faster than CBs currently expect, corporations will struggle to maintain margins, and PE ratios will shrink.

A few weeks ago, some analysts were toying with the thought that “peak tightening” had come and gone and that the market had “over-priced” how aggressive the Fed would be. By the end of this week, sentiment had shifted to the idea that (to para-phrase BofA’s Michael Hartnett) “In short, the inflation shock isn’t over, and the rates shock is just starting (the growth shock is coming, and so is a recession.”)

The US 10-Year bond futures are at a 12-year low (yields at a 12-year high of 3.17%).

The US 2-year note futures are at a 14-year low (yields at a 14-year high of 3.07%.)

The (May 12 to June 2) bear market rally is over

The S+P has closed lower in 9 of the last 10 weeks, with this week being the worst week YTD, yet volatility metrics remain below the highs made on May 12, when the S+P touched a 14-month low and was (briefly) down more than 20% YTD. Perhaps the market isn’t “worried enough” to have made a bottom.

The market cap of global stocks is down ~$23 Trillion from last November’s ATH of ~$100 Trillion. That’s equivalent to about one full year’s worth of US GDP.

The US Dollar rallied against virtually all other currencies this week

My FX mantra for the past 40 years has been that capital flows to the USA for safety and opportunity. When markets are “worried,” the USD is bid. The “opportunity” in the USD now is higher interest rates and security in an appreciating currency.

The Yen was down again this week (down 14% YTD), hitting a new 20-year low due to ultra-loose BOJ policies. However, a rare joint statement of “concern” from the BoJ, the MoF and the Financial Services Agency late this week may presage a “change in tone” at next week’s BOJ meeting.

The Canadian Dollar hit a 20-month low on May 12 (as the S+P hit a 14-month low and the USD made a 20-year high) and then rallied to nearly 80 cents over the next four weeks as the USD weakened, commodities (especially crude) and stocks rallied, and market sentiment shifted to risk-on.

The CAD fell nearly two cents this week as the USD surged (the Euro plunged) and stock markets tumbled. The CAD weakness was sustained despite Canadian unemployment levels hitting a 46-year low of 5.1% and average wages growing ~4% YoY. (These reports will likely harden the BoC’s resolve to raise interest rates aggressively – keeping Canadian interest rates at a premium to American rates.) The CAD also fell despite fossil fuel prices remaining firm.

The solid historical correlation between the CAD and commodity prices may not be showing up in USDCAD (the tremendous strength of the USD has trumped the CAD/commodity correlation) but note that the CAD is at a 9-year high against the major European currencies and a 14-year high against the Yen.

Gold rallies ~$50 on Friday despite surging interest rates and a strong USD

Gold hit a new All-Time High of ~$2075 following the Russian invasion of Ukraine (and the subsequent sanctions) but dropped as much as $300 by early May as the USD strengthened and as interest rates (especially real rates) rose.

On Friday morning, gold dropped to a 3-week low on the CPI report but then rallied ~$50 to a one-month high even as the USD soared. It is unusual to see both gold and the USD enjoy a big rally on the same day – it is often a sign that markets are “worried.”

Gold open interest climbed about 28% from early February to the March spike and has now returned to early February levels. (Speculators bought the market on the way up and sold it on the way down.) Given that gold has “held up” reasonably well despite the strong USD and the return of real yields to positive territory, the purging of speculative interests may set the stage for another leg higher.

Fossil fuel markets remain strong

WTI crude oil traded above $130 in early March (when gold was hitting ATH) for the first time since 2008. Prices dropped ~$35 following that spike but have been trending higher for the past two months, with this week’s close (on a continuous basis) the highest since 2008. Gasoline and Heating Oil futures (lacking refining capacity) have been stronger than WTI futures and have recently traded at ATH.

While gasoline, diesel and crude oil prices have been the focus of media attention, North American natural gas prices have more than tripled from their average over the past five years. (The US is exporting LNG to Europe.)

With the Yen at 20-year lows, the Yen price of WTI crude has soared to an ATH.

My short-term trading

I returned from a 5-day road trip on Monday afternoon, and it took me a few days to understand what to do in the markets. I shorted the S+P futures Thursday morning and covered the position shortly after the CPI report Friday morning. I’m flat going into the weekend, and my P+L is up >0.50% on the week.

On my radar

The possibility of Central Banks “tightening into a recession” sets the stage for “something” (or maybe several things) to break. I will look for opportunities in markets that have made strong one-way moves to reverse. That doesn’t mean simply taking a counter-trend position, but if I see a trend break and a subsequent attempt to return to trend fail, I’ll get interested.

Thoughts on trading

One of the best reasons I keep writing this blog is that it connects me with other traders I would not otherwise have met. When swapping emails with another trader, I usually keep the “message” short and to the point. Here are a couple of edited quotes (from me) to another trader this week:

My road trip caused a disconnect between me and the markets, which may be a good thing. My trading time horizon the past few months had become very short-term – day-trading – and historically, my strong suit has been a swing-trading time frame; a few days to a few weeks.

The short-term volatility in markets (particularly equity futures) “forced” me into a shorter-term time horizon.

So I’m back at my desk with a “clean sheet” in front of me. As a person with “multiple personalities,” I’ll be interested to see who shows up!

Interesting that you mention Cathie Wood. I saw a story about her maintaining that deflation is a bigger worry than inflation – that’s an interesting thought (especially if she’s right!)

The essence of what you’re doing (looking at market correlations, seeing a breakdown in CAD/WTI, and CAD/commodities – seeing the near-universal energy market bullishness) is classic Bruce Kovner: What I am really looking for is a consensus that the market is not confirming. I like to know that there are a lot of people that are going to be wrong.

Risk Management Quotes from the Notebook

At that moment, I was confronted with the realization that I had blown a great deal of what I thought I knew about discipline. To this day, when something happens to disturb my emotional equilibrium and my sense of what the world is like, I close out all positions related to that event. Bruce Kovner, The Market Wizards, 1989

My comment: The Market Wizards is a must-read for traders, and the interview with Bruce Kovner is one of the best in the book. As I keep repeating, I make money from managing risk, not from having a great crystal ball. I know that things I can’t possibly anticipate can happen, so I need to do whatever I can to avoid taking a devastating trading loss.

Time and time again, when I read interviews with accomplished traders who are asked for advice for new traders, they say, keep your size small. That way, if you’re wrong, you don’t get killed. Having a BIG position inevitably means you’ve got your ego tied up in the trade, and if it goes against you, you will either fight it or freeze – which is precisely the worst thing you can do.

The Barney report

When I returned from my 5-day road trip, Barney was thrilled to see me – and I was delighted to see him. We had previously never been apart for more than a day.

We live on a golf course, and Barney loves to find golf balls. I take him out in the evening when no players are on the course, and he finds balls I can’t see. He gets a treat every time he finds a ball.

My wife and I have been giving away golf balls on our back fence for the past five years. We will have given away over 11,000 balls by the end of this season – and these days, Barney is finding more balls than my wife and I put together!

A request

If you like reading the Trading Desk Notes, please forward a copy or a link to a friend. Also, I genuinely welcome your comments, and please let me know if you want to see something new in the TD Notes.

Listen to Victor talk about markets

I’ve had a regular weekly spot on Mike Campbell’s extremely popular Moneytalks show for >20 years. The June 11 podcast is available at: https://mikesmoneytalks.ca.

You can listen to my June 4th interview with Mike, where I talk about some of my risk management rules, here.

You can listen to my 30-minute June 11 “This Week In Money” interview with Jim Goddard. Marc Faber and Ross Clark are also on this week’s podcast.

Victor Adair retired from the Canadian brokerage business in 2020 after 44 years and is no longer licensed to provide investment advice. Nothing on this website is investment advice for anyone about anything.

Trading Desk Notes For April 2, 2022

The Fed is finally ready to roll

After much hesitation, the Fed is signalling that it will raise interest rates aggressively over the next several months. Here’s what the market expects from the Fed (h/t to The Macrotourist):

The Chicago Mercantile Exchange futures market pricing of Fed funds through March 2023:

After the sharp rise over the next 12 months, the market is pricing short-term interest rates to drift lower (tightening into a recession?)

Last year, in the face of sharply rising inflation, the Fed not only kept interest rates low but sustained their Quantitative Easing (QE) policies, buying hundreds of billions of dollars worth of bonds and mortgages. Their justification was that inflationary pressures were “transitory” and that “on average” inflation would be around 2%.

The market saw things differently and began to price in persistent and rising inflationary pressures. The market viewed the Fed as being “behind the curve;” the Fed was following, not leading the market.

This chart of the Treasury 2-year Note gives some perspective on how dramatically the market moved (before the Fed) since last fall. (Falling prices mean yields are rising.)

Some analysts expect the Fed’s tightening (their attempt to “cool” inflation) will cause the economy to contract (a highly indebted economy can’t handle rising interest rates), and they will be guilty of tightening into a recession.

Other analysts see continuing high inflation, despite rising interest rates as governments increasingly embrace fiscal deficits. They believe that real interest rates will remain negative, and the market will demand “inflation hedges.”

From a consumer (voter) perspective, inflation creates a lower standard of living as their money has less purchasing power. Governments, seeking votes, may attempt to ameliorate this perception of a lower standard of living. For instance, they may cut some taxes, run large budget deficits, release crude oil from the strategic reserve, and suggest that to ensure the security of domestic supply, people will need to “shoulder” higher prices for “the common good.” (Do you remember President Jimmy Carter telling people to turn down the thermostat and put on a sweater when fuel prices soared?)

It seems highly likely that after twenty or thirty years of relatively benign inflation, we are “transitioning” into an era of higher inflation and supply shortages.

Real estate charts

USA home prices:

Soaring home prices and mortgage rates may produce “demand destruction” for new and existing homes. This chart of the Homebuilder’s ETF is at >12-month lows.

The bond market: was Q1/22 the worst quarter ever?

Different analysts have described Q1/22 as the “worst ever” for the bond market. When I look at multi-decade charts of the long bond, I can’t entirely agree with that conclusion, but if I look at shorter-term bond charts (two to five-year maturity), I can agree.

I’ve seen other reports claiming that the classic 60/40 stock/bond portfolio had its worst quarterly performance in >40 years as stock and bond prices fell in Q1/22.

The commodity market: Q1/22 was the best ever!

The leading commodity indices have been trending higher since the 20+ year low made in early 2020. The indices spiked dramatically higher in Q1/22 as the Russian invasion of Ukraine ignited supply concerns for food, energy, base metals and other commodities.

The ultimate “pain trade”: buy bonds / short commodities!

On the theory that market momentum takes markets too far in one direction and that “reversion to the mean” causes the price/sentiment “pendulum” to reverse course, is there an opportunity/reason to look at buying bonds and selling commodities – as an outright trade or as a “recession” hedge? Could a Fed “policy error” induce a “growth shock?

Commodities have had a spectacular run with a possible blow-off top in March, and they have rolled over from a lower high. The bullish commodity “narrative” remains strong, and prices may well be much higher in the future, but if the indices drop through the March lows, they could fall further.

Bonds have been in the doghouse, and the “whole world” is short bonds. Maybe the “inflation is going to be much higher for much longer” narrative is fully priced in. (See the Quotes section below for a discussion of “fully priced in.”)

A vicious circle: wild price action and shrinking liquidity

Wild price swings across equities, interest rates, commodities and some currencies in Q1/22 led to significantly reduced liquidity as traders backed away from risk as margin requirements skyrocketed. Volatility soared. Falling liquidity accelerated short-term price swings and meant that option positioning and capital flows had an outsized impact on prices.

Open interest in several futures markets fell to multi-year lows as wild price action and increased margin requirements caused traders to back away. For instance, open interest in the leading S+P 500 futures contract dropped to a 14 year low. Open interest in fossil fuel contracts, wheat and soy oil contracts, and silver and copper contracts fell to multi-year lows.

My short term trading

I caught the first few days of the stock market rally off the mid-March lows – but took profits too soon. Last week, I started shorting the rally (with small positions and tight stops) and lost a little money. I thought that the rally was a bear market rally and would rollover. This week, I continued with that idea, lost a little money early but benefitted from the 100+ point decline late in the week. I stayed short a small S+P position (with stops that will lock in a profit if the market rallies) into the weekend.

The Wednesday to Friday decline may have been only a brief correction to the rally that began mid-month, but if prices break decisively below 4500, that will harden my views that this has been a bear market rally.

I’ve been shorting the CAD around 80 cents, thinking that the spectacular YTD commodity rally could fade. I’ve lost a little money shorting the CAD but remain short into the weekend.

My P+L on realized trades is down ~0.75% this week, while unrealized gains total ~0.60%.

Transports flash a warning: Only one stock in the 20-stock Transports Index closed higher on Friday, and it was only up a fraction of 1%. The index closed Friday down ~7.3% below the 4-month highs made Wednesday.

Thoughts on trading

My primary trading objective is to protect my capital. My experience tells me that I will have winning trades and losing trades, so it’s important to keep losses small to be “alive and willing” to make future trades that might be winners. Staying alive and willing to trade is critical!!

I measure my risk tolerance in absolute dollars, not as a percentage of the item I’m trading. As a result, the huge price swings in many markets over the past few months drew me into shorter and shorter time frames and smaller-sized trades. For instance, it has not been unusual for the S+P (and many other markets) to move as much in an hour as it previously moved in a day.

Intraday trading seems to be more subject to chart patterns and random “noise” than swing trading. (Or it could be that all time frames have been subject to the recent poor liquidity, “headline” risk and choppy price action.)

I’ve long maintained that traders need to find a way to trade that “suits” them. My “sweet spot” seems to be a swing trading time frame of a few days to a few weeks, and that time frame appears to assign value to assessing market fundamentals, shifting sentiment and price action.

For most of my trading career, if I closed out a trade the same day I put it on, it was almost always a losing trade – I rarely initiated a trade to book a profit from it the same day. I’ve done some day-trading the past couple of months, and I’ve made some money doing that, but it required me to be constantly in front of my screens, and it is a different way of trading. I prefer the swing trading time frame over the day-trading time frame.

Years ago, I wondered if the path to making more money from trading would require me to increase my size substantially or to stay with my winning trades much longer. Or both! I decided to try staying with winning trades longer. In terms of the Rabbit or the Tortoise, I seem to be a Tortoise! I hate big losses – so I’m not willing to risk big losses to make big gains!

Quote of the week

“Sometimes the most difficult part of investing is not figuring out what will occur, but what’s already priced in!” Kevin Muir, the Macrotourist, April 1, 2022.

My comment: I read this quote in Kevin’s blog yesterday and laughed out loud! This is the trader’s perennial conundrum – “Is my trade idea already fully expressed in the market? If it is, I’m buying the high; if it isn’t, I can make money if I buy it here, and the market goes higher.”

Dennis Gartman used to say that a trader’s job was to buy high and sell higher – that is, buy markets that are going up and sell them after they have gone up some more. (Sell markets that are going down and take profits after they have gone down further.) In other words, trade in line with the trend.

The Barney report

Barney is nearly seven months old and weighs 52 pounds. Most days, we do a one to two-hour morning walk and a half-hour afternoon walk, and he sleeps when we come home. This week, we got out for his first-ever after-dinner walk, and Barney saw his first rabbit. Thankfully, he was on a leash at the time!

A Request

If you like reading the Trading Desk Notes, please forward a copy or a link to a friend. Also, I genuinely welcome your comments, and please let me know if you would like to see something new in the TD Notes.

Listen to Victor talk about markets

I’ve had a regular weekly spot on Mike Campbell’s extremely popular Moneytalks show for 20 years. The April 2nd podcast is available at: https://mikesmoneytalks.ca.

Victor Adair retired from the Canadian brokerage business in 2020 after 44 years and is no longer licensed to provide investment advice. Nothing on this website is investment advice for anyone about anything.

Trading Desk Notes For March 26, 2022

Interest rates are surging higher

American interest rates hit All-Time Lows in August 2020. Short rates stayed close to zero for the next fifteen months while mid-term and especially long-term bond yields rose (prices fell.)

In October 2021, forward markets for short-term rates began to rise. The rate of change accelerated in January and February, stalled when Russia invaded Ukraine in late February but dramatically accelerated the last three weeks.

Short rates have been rising faster than long rates, causing some inversions (when short-term interest rates are higher than longer rates.) Historically, an inversion in the 2-year/10-year spread is a harbinger of recession. The 10-year is currently ~20bps premium the 2-year.

Why are interest rates rising so quickly?

The keyword for the Fed last year was “Transitory.” The Fed expected the sharp rise in inflation to be a “flash in the pan,” and therefore, it would be wrong to raise interest rates (or to stop their QE program) to “kill inflation.”

Some folks agreed with the Fed’s assessment, other folks didn’t, but as inflation continued to rise and became more pervasive, the forward markets began to price in higher interest rates.

This year, communications from the Fed have become increasingly hawkish, and market analysts have “hop-scotched” one another as they continued to raise their interest rate forecasts. This week, Citibank announced that they expect the Fed to raise rates by 50 bps at each May, June, July, and September FOMC meeting and raise rates by 275 bps in 2022.

There is also “talk” that some major players are wrongly positioned with their interest rate exposure and are aggressively selling Eurodollar futures. (Think of Jeremy Irons and Kevin Spacey in Margin Call.) If there is a “motivated seller” hitting all bids, other players will try to front-run that seller – adding to pressure on prices.

Then there is the thought that governments (everywhere?) will be spending more “stimmy” to help voters deal with rising food and energy costs. Why not? Governments “crossed the Rubicon” with direct fiscal stimulus (helicopter money) during the Covid lockdowns, and there’s no going back to fiscal “prudence” now (especially with mid-term elections looming!) Who wants to buy Treasuries when governments are issuing a flood of paper to fund fiscal stimulus, and the Fed has shut down QE?

This chart was created mid-week (when 10-year yields were only 2.38%), but its point is even more valid, with rates at 2.5%.

Remember when high prices were the best cure for high prices? That quaint thought assumed that high prices stimulated both new supply and demand destruction. But as the Heisenberg Report argues, “demand destruction” in Western Democracies may no longer be politically viable. Governments will fight inflation with inflationary policies! Voters will love it, but bond investors won’t.

Is the forty-year bond bull market over?

The All-Time High in the bond bull market was August 2020, when the ten-year Treasury yield was ~0.50%. The current yield is ~2.50%, and the forty-year uptrend line is at risk of being decisively broken.

But the Eurodollar forward curve shows rates rising into June 2023 but then drifting lower after that. This pricing may be on the expectation that the Fed will be “tightening into a recession” and will have to reverse course or risk an economic collapse.

If that is the case, the bond market will “see” the slowdown coming, and bond prices will rise. Maybe.


Canadian interest rates have also been soaring. This week the yield on the ten-year closed at 2.55% – an eight-year high. Futures market pricing for December 2022 Banker Acceptances has 3-month yields >3%, an increase of ~ 1.2% in the last three weeks.

The Loonie closed above 80 cents this week for the first time since early November as commodity currencies are bid.

The Toronto Stock Index hit new All-Time Highs this week. Australian and Brazilian stock markets have also been surging higher.


The Yen plunged the past three weeks, hitting a six-year low, as American interest rates have surged while the BoJ is committed to capping their ten-year bond at 0.25%. Red hot commodity markets also hurt the Yen, but a weak Yen helps the Japanese stock market.

The intersection of food, energy policies and geopolitics

The Russian invasion of Ukraine set off multiple chains of consequences in food and energy that may quickly escalate into a generational food crisis due to diminishing supply availability. I recommend the latest piece from Doomberg (a ten-minute read) that examines how shortages of fertilizer, herbicides, diesel, propane, computer chips, and labour may impact the cost and availability of food. (Late note: a subscriber just emailed me that Doomberg should have added that a severe drought is developing in Canadian and American grain-growing regions. Pray for rain!)

The low on this chart was March 24th – the day Russia invaded Ukraine. We are going to need more tractors.

How delusional green policies set up the Russian invasion of Ukraine

Here’s a quote from Michael Shellenberger’s latest piece“But it was the West’s focus on healing the planet with “soft energy” renewables, and moving away from natural gas and nuclear, that allowed Putin to gain a stranglehold over Europe’s energy supply. As the West fell into a hypnotic trance about healing its relationship with nature, averting climate apocalypse and worshiping a teenager named Greta, Vladimir Putin made his moves.”

My short term trading

“got busy” with other things this week and didn’t trade much. I thought that the stock market might correct after last week’s steep rally (in last week’s Notes, I wrote that it may have been a bear market rally), and I looked for setups to get short. That didn’t work, and my P+L was down ~0.20% on the week. (I was trading small size with tight stops.)

I thought soaring interest rates might cause stocks (especially long-duration tech stocks) to weaken, that the winding down of corporate buybacks going into the blackout period ahead of quarterly reports would weaken stocks, that option dealers not being net short gamma after last week’s rally would weaken stocks – but they just kept rising. Maybe the market is looking at the seasonality chart! Yikes!

One of my favourite trading mantras is that there’s nothing wrong with being wrong except staying wrong, so when I’m wrong, I’m gone.

Thoughts on trading

I’m falling behind in my attempt to “keep up.” I’ve got podcasts and videos and research reports stacking up, and I know I’ll have to hit the “delete” button on many of them. Other traders I talk to/swap emails with tell me they have the same problem.

There is so much “going on” and so many violent moves in so many different markets that it’s impossible to stay current with everything.

Quotes from the notebook

“There are no solutions, there are only trade-offsand you try to get the best trade-off you can get, that’s all you can hope for.” Thomas Sowell

My comment: I’ve been a Thomas Sowell fan for years. He is a true American icon. This quote seems particularly appropriate for today. It applies to Russia/Ukraine, the Maltusiasn forecasts of soaring commodity prices, the prospect of ever-growing and ever-intrusive government, and to virtually any problem I see today. Do yourself a favour and spend a few minutes reading about this man, his life and his pithy quotes. He is a beacon of clear-eyed observation and an inspiration to truth-seekers everywhere.

The Barney report

One of the great things about writing this blog is that I have developed relationships with people worldwide that I would otherwise never have known.

Recently, a man in Connecticut asked his wife to paint a portrait of Barney based on a photo I posted on this blog. He sent me the picture (painted on a rock) as a thank you for the value he received from reading my blog.

How amazing is that!

The portrait stands on the windowsill behind my screens – right where I can see it every day.

You can see more of his wife’s pet portraits on her Art Instagram page: @querocks.

A Request

If you like reading the Trading Desk Notes, please forward a copy or a link to a friend. Also, I genuinely welcome your comments, and please let me know if you would like to see something new in the TD Notes.

Listen to Victor talk markets

I’ve had a regular weekly spot on Mike Campbell’s extremely popular Moneytalks show for 20 years. The March 26th podcast is available at: https://mikesmoneytalks.ca.

Victor Adair retired from the Canadian brokerage business in 2020 after 44 years and is no longer licensed to provide investment advice. Nothing on this website is investment advice for anyone about anything.

Trading Desk Notes For March 19, 2022

The best weekly equity market rally in two years was “setup” by extremely negative sentiment

The Vanguard Total Stock Market ETF (VTI) had its lowest weekly close in nearly a year last Friday – down ~14% from January’s All-Time Highs. In last week’s TD Notes, I wrote: Equity market sentiment is currently very negative. If/when prices turn higher, the rally could be dramatic.

It was.

Extreme negative sentiment persisted early this week. The major stock indices fell on Monday, but sentiment reversed in the Monday overnight session, and the indices began to surge higher. DJIA futures rallied >2,000 points from the Monday overnight lows to Friday’s close. All of the leading American Indices closed Friday at their best levels in over a month, the Dow Jones Transportation index had its best weekly close in four months, and the (commodity heavy) Toronto Stock Index closed at All-Time Highs.

The DJIA, S+P and VTI indices have recovered ~50% of their declines from ATH; the NAZ has recovered <38%. (The different recovery levels hint at the “rotation” since November.)

Extreme commodity market sentiment also “set up” dramatic price reversals

WTI crude oil futures and the broad commodity indices surged to 14-year highs last week; Chicago wheat and New York copper surged to All-Time Highs. The concern was “supply shortages,” but uncertainty, poor liquidity and volatility created fears of existential systemic risk – a grand Minsky moment – when over-levered “Big Shorts” might trigger this market’s version of a Lehman failure.

The peak in the commodity surge was in sync with the “Nickel” publicity, and markets reversed sharply after that.

Currency markets also had dramatic sentiment-driven reversals

The US Dollar Index hit a 22-month high last week, but the real “action” was in Euro spreads. The Euro plunged against the Yen, the Swiss Franc, the British Pound and the USD in February / early March, but reversed higher against all currencies on March 7th.

The Euro Vs the USD:

The Japanese Yen fell to a 6-year low against the USD this week. The prospect of rising US interest rates while Japanese rates stay flat and the possibility of soaring commodity prices apparently paints a dim future for the Yen, and speculators are (not unexpectedly) hugely net short. What could possibly cause the Yen to rally?

Gold spiked and fell back

Comex gold futures spiked to new All-Time Highs on March 8th but were nearly $100 lower within 24 hours. This week, gold briefly traded $185 below last week’s highs.

Gold ETF holdings have risen ~192 tonnes YTD, after falling ~ 287 tonnes in 2021. In 2020 gold ETF holdings increased ~ 751 tonnes.

Interest rates had a different kind of reversal

Interest rate futures rallied briefly around the beginning of March (maybe the Fed would “back off” from raising rates because of the war), but expectations reversed from those levels as the war seemed to be increasing inflationary pressures. Short rates have been rising faster than long rates, creating “inverted yield curves,” which may foreshadow a recession.

The Fed has been following, not leading the market.

My short term trading

I started this week flat, but I was looking for a bounce from last week’s extremely negative sentiment. I made ten trades, beginning Sunday afternoon, buying S+P, Dow and Euro futures. Three of the trades lost money; seven produced gains. I was trading small size with tight stops. I covered my last position on Thursday’s close and stayed flat into the weekend. My P+L was up ~1% on the week.

On my radar

“What are we trading?” is an existential question. Uncertainty, volatility and thin liquidity make it challenging to define/quantify risk. Headline risk is relentless. The possibility/inevitability of another “Nickel” debacle is ever-present. Inter-market correlations continue to shift. Broken supply chains are likely to sustain high inflation, while political risks limit arbitrage that could dampen price spikes and volatility. It’s a Brave New World.

Sentiment drives prices. Extreme sentiment = extreme price action = a set up for extreme price reversals.

This week, the 2,000 point rally in the Dow may have been the beginning of a charge to new All-Time Highs, or it may have been a classic bear market rally. I don’t know, but I’m leaning towards a bear market rally.

I’ll be looking for opportunities to trade price action rather than “hunches” about what “should” happen.

Thoughts on trading

In the January 29th Notes, in the Quotes from the notebook section, I quoted Bruce Kovner from the 1989 edition of The Market Wizards:

“What I’m really looking for is a consensus that the market is not confirming.”

I keep that in mind when I see “retail” rush into some part of the market. The late 1990s Dot-Com boom and the subsequent crash was a classic, but so was the rush in cannabis, ESG, work-from-home, and lately, commodities – except that commodities haven’t crashed yet – and they may not crash, but the bullish “narrative” has been robust. If the bounce-back following the correction from the March 8th highs rolls over, I’ll look for opportunities to fade bullish commodity enthusiasm.

Quotes from the notebook

“The best traders have evolved to the point where they believe without a shred of doubt or internal conflict that “anything can happen.” Mark Douglas, Trading in the Zone, 2000

My comment: I used to have a Post-it note taped to one of my screens that said, “Anything Can Happen.” I had never heard of Mark Douglas when I taped the note to my screen, but I kept it there after reading his book.

I once had a senior lawyer from a big law firm interview me to do some trading for his client. Years later, he told me that he decided to recommend me to his client when he saw that Post-it on my screen!

“The trader’s job is to imagine the future different than what it is now – find a trade that will profit from that change, and manage the risk of that trade.” Ben Melkman, RTV, 2017

My comment: I agree 100%.

The Barney report

It’s hard to pay attention to my screens when Barney wants to play – so I take him for a long walk, which keeps me from getting too wired, and when we return home, he falls asleep at my feet, and I can get some work done!

Chicago dyes the Chicago River Green on St. Patrick’s Day! I’ve seen it and I love it!

A Request

If you like reading the Trading Desk Notes, please forward a copy or a link to a friend. Also, I genuinely welcome your comments, and please let me know if you would like to see something new in the TD Notes.

Listen to Victor talk markets

I’ve had a regular weekly spot on Mike Campbell’s extremely popular Moneytalks show for 20 years. The March 19th podcast is available at: https://mikesmoneytalks.ca. Mike’s closing editorial – he calls it his “Goofy” – is a scathing review of the Government’s hypocrisy around the freezing of bank accounts near the end of the Trucker’s Convoy protest.

This week I also did a 30-minute interview with Jim Goddard on Howe Street Radio. We talked about the wild market action, my trading, and what I think may happen next in different markets. The Youtube link is:

Victor Adair retired from the Canadian brokerage business in 2020 after 44 years and is no longer licensed to provide investment advice. Nothing on this website is investment advice for anyone about anything.