The Big Picture – Key Turning Dates

Posted by Victor Adair for Moneytalks

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In my market comments last year I frequently referred to the KEY turn dates of May 2 and Oct 4…when the directional trends of a number of important markets changed. For instance, the S+P 500 and Crude Oil both made important highs on May 2 (and the US Dollar made an important low) while on Oct 4 the S+P 500 and Crude Oil both made important lows (and the US Dollar made an interim high.)


Last year, as markets approached the KEY HIGH turn date of May 2, 2011, bullish enthusiasm was very strong across asset classes….silver was charging to $50 an ounce and the VIX traded down to a 4 year low…the COT data indicated that speculators were very aggressive buyers. I was anticipating that the (bear market) rally from the March 2009 lows was reaching a crescendo…but I was waiting for a confirmation that a top had been made.


May 2, 2011 turned out to be a significant high in a number of markets and prices declined into late June. There was a “bounce back” rally into July (which took a few markets like AUD, CAD, Copper to marginal new highs) but then most asset prices (except for gold) fell sharply through the August/September period into the KEY Oct 4 lows. During that break the VIX rose sharply and by Oct 4 it hit 46%…three times what it had been at the May 2 highs…a great indicator of a bearish extreme. Since the Oct 4 lows in stocks and commodities the VIX has tumbled to 17% this Friday….its lowest level since July of last year….as rising asset prices have dampened the market’s anxiety.


Over the past several weeks asset markets have “wanted” to go higher…a “risk on” environment….especially since the Euro joined the party and turned higher in mid-January.

This Friday the DJI registered its highest weekly close since May 2008 while the Nasdaq index closed at its best levels since December 2000. The S+P 500 and other broad indices of American stocks are still below the highs they made last year, as are the major European, Canadian and global stock market indices….however, nearly all of the major stock market indices around the world (Shanghai is a notable exception) have been trending higher since their KEY Oct 4 lows. Once again I am anticipating that the asset rally is reaching an extreme and will soon make an important turn lower.


For the past several weeks I have been “cautiously” participating in the “risk on” asset rally in my short term trading accounts. From time to time I have taken long positions in the S+P 500 and the CAD futures markets, not on a “buy and hold” basis, but on a “short term trading” basis. I have been cautious because I have been concerned that the rally was “running on fumes” and that there was a real risk of a significant downturn. At the end of last week I had closed out my long CAD futures position and I started this week flat in my trading accounts…anticipating a possible downside break in asset markets, but waiting for confirmation that a break was actually happening before establishing short positions.


Asset prices started this week on a soft tone but there was no real confirmation that the rally was over and a break was developing. I waited. By mid-week the “risk on” tone was re-established and markets went bid. On Friday the US employment data was interpreted as bullish and European and North American stock markets staged a strong rally. The Euro currency traded sideways for most of the week (Euro peripheral bond yields fell and the index of European bank share prices rose to a 6 month high as the market wants to believe that the European debt problems have been “stabilized”) while the commodity currencies all traded higher. The CAD closed the week at a 3 month high Vs. the USD, while the AUD closed the week at a 15 year high relative to the CAD (I see this as an indicator that bullish enthusiasm is getting overdone.) Gold had rallied $225 from late December to mid-week but seemed to run into resistance around $1750 and dropped $32 on Friday as European debt worries faded and the (apparently) strengthening US economy caused a sharp break in bond prices.


In my short-term trading accounts I took a “one unit” short position in the CAD Vs the USD on Friday’s close on the view that the “run for the roses” in asset prices this week was overdone. This is clearly an opinion-driven counter-trend trade and I won’t keep it if the risk markets continue higher.  


The fact that the DJI closed this week above its KEY May 2, 2011 highs (at its highest level in nearly 4 years) may be an early warning sign that we are seeing a sea-change in the entire structure of the markets. If the much broader S+P 500 index trades above last year’s May 2 highs then I will have to re-think some of my “Big Picture” market views….which have been that the rally in stocks and commodities from the March 2009 lows to the May 2011 highs was actually a bear market rally…that the decline into the Oct 4 lows was only the first leg of the resumption of the secular bear trend…that the US Dollar ended a multi-year bear market in July of 2008 and made a  KEY “higher low” on May 2, 2011…..and will be trending higher for a number of years….that yields on US Bonds are near a secular low and will be trending higher….and that the $1900 August high in gold was a key high and much lower prices lie ahead.  


As a trader I always have “Big Picture” market views….which frequently need to be changed as market conditions change! I often trade against my “Big Picture” views in my short-term trading accounts, as I have with long positions in CAD and the S+P futures over the past several weeks…and these are always cautious positions….but I’m happiest, and more aggressive, when my short-term trading positions are aligned with my “Big Picture” views….and the markets are giving me evidence that I’m right! Bottom line….I’m currently anticipating that asset prices are about to take a significant break…if I see a confirmation of that I will be establishing futures/options positions to profit from falling stocks and commodities….however, if the cash S+P 500 (currently around 1345) trades up through last year’s May 2 highs (1370) I will have to re-think my “Big Picture” views and how I want to trade.


About Victor Adair

Victor is a Senior Vice President and Derivatives Portfolio Manager at Union Securities Ltd., and is also a regular market analyst and frequent host on Canada’s most popular financial radio talk show Money Talks on CKNW980 in Vancouver, BC. He began trading in the financial markets 40 years ago and has held a number of senior positions during his long career as a commodity and stockbroker.

Victor’s trading focus is primarily on the currency, precious metal, interest rate and stock index markets and his clients are high net worth individuals and corporations.