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.
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!
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.