Live from the Trading Desk

The Kenny Rogers School of Risk Management

Victor shares how The Gambler would play today’s volatile markets. Hint: You’d better be nimble. 

….Michael’s Editorial: We Can Make ‘Em Suffer. Why? Because We’re The Government

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Victor Adair: Remaining Short Stocks

Live From the Trading Desk: Victor had a big week capturing the huge move down in the US Stock Market & profitably closing out a short Canadian Dollar position. He remains short the Stock Market, sees something going on in the Crude Oil market, & explains how he intends to manage risk – R. Zurrer for Money Talks

Transcript:

I started this week with short positions in CAD, Gold and the S+P. I took profits on the short CAD when it started to rally late Tuesday on news that the US was “softening” its NAFTA position on auto parts. I liquidated my gold position for a small loss on Wednesday when spot gold traded above $1325 and I remain short the S+P with a combination of option positions.

The Canadian Dollar tumbled >6.5% from the end of January to Monday’s lows. It had closed lower for 5 out of 7 weeks and hit a 9 month low. It just about registered a Weekly Key Reversal Up this week. I liquidated my short position on the NAFTA/auto news because the market had been very focused on Canada’s vulnerably to Trump’s protectionist bombast and any “let up” could trigger a rally in an oversold market. I was also puzzled by the bid in the crude oil market the last 2 weeks (in the face of stock market weakness) and I thought CAD could benefit from rising crude. The USD feels “heavy” ( the Yen is at its highest levels since Trump’s election) despite the HUGE American interest rate premium over other currencies and if the USD falls from here that would give CAD a lift.  I maintain a bearish view on CAD…I’m just not short at the moment.

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The gold market was under pressure last week and looked vulnerable…I had a bullish view on the USD so I bought gold puts. On Tuesday of this week gold closed at its lowest price in 3 months and I expected it was going to take a tumble…but it turned higher on Wednesday and I bailed out. This week the US Dollar Index registered a Weekly Key Reversal Down while gold registered a dramatic Weekly Key Reversal up.

I bailed out when gold started to rally because I believe that trade selection is only a small part of successful trading…risk management is much more important…and the first chapter in the book on risk management is, “Cut your losses and let your profits run.”

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The US stock market had “rolled over” Monday/Tuesday last week…a move I had been waiting for…so I bought S+P puts but by the end of the week I had a “low conviction” level on the trade because the market hadn’t broken down. Thankfully I stayed with the trade and my unrealized gains are now many times the size of the loss I took on my gold trade.

My view on the US stock market has been that the big break from the late January highs was not a “Buy The Dip” opportunity but was likely the start of a “sentiment change” and I’ve been trading stocks from the short side. I’m of the view that the market makes the news, not the other way round. The “Facebook fiasco” the “changing of the guard” in the White House, the “Trade Wars” headlines, the new “Powell Fed” are all things that hit a market that was already on its way down from a very overextended top.

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The crude oil market rally the past 2 weeks has puzzled me. I’ve made some pretty good money trading WTI from the short side over the past 4 years and my bearish bias is hard to shake. I find it VERY interesting that crude has been rallying the past 2 weeks (WTI is up ~10% from last week’s lows) while the stock market has been falling. Since last summer WTI and the S+P have moved up and down pretty much in harmony…but that has changed dramatically.

I’m always watching inter-market relationships and when I see them change I ask, “Why is that?” Could it be that “somebody” senses that the new “Bolton/Pompeo” team in the White House is going to re-sanction Iran? (MBS was in Washington this week.) Is there some other supply side shock brewing out there? I don’t know, but my gut instinct…and the chart pattern…tells me to NOT be short WTI now.

Canadian Investors Take Note!

Victor hits another home run shorting the Canadian Dollar a double going long the US Dollar by being short Gold and a solid base hit shorting the US Stock Market. Victors comments on the Canadian Dollar are valuable for any Canadian Investor – R. Zurrer for Money Talks

Victors Transcript:

I started this week with a clean slate (I was skiing at Whistler last week and didn’t want any open positions) but I had a list of trades that I hoped to make if the opportunity presented itself.

Top of my list was to get short CAD and I did that Monday when CAD rolled over after last week’s little bounce. Dovish comments from Poloz on Tuesday re-focused the market on interest rate spreads (current and expected) between Canada and the USA (2 year spread now over 50bps) and that pushed CAD lower. Broad USD strength later in the week and Trump’s NAFTA comments increased the pressure and CAD ended the week at 9 month lows against the USD…down 5 of the last 7 weeks.

CAD is weak against a broad range of currencies…not just the USD. YTD it is down ~4% against USD,~6% against EUR, ~7% against GBP, ~3% against AUD, ~ 8% against MXN, and ~10% against JPY. This “across the board” CAD weakness points the finger at Canada-specific problems (self-inflicted poor fiscal policies, lack of competitiveness, domestic debt levels, etc.) The falling CAD is acting as a “release valve” or “shock absorber” for the Canadian economy…which is what should happen with a floating exchange rate. I think CAD may have much further to fall.

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Next on my list was to get long the USD and I did that by shorting Gold on Thursday. (Gold and EUR have been moving up and down against the USD in virtual lockstep so shorting gold was more or less the same thing as shorting EUR.) This is an “anticipation” trade…I anticipate that if gold falls a few more dollars it could trigger a wave of selling that would take prices much lower. On the weekly chart gold had its lowest close since December.

 

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A big part of my USD bullish bias is the anticipation that the Fed will “widen the spread” over the ECB. Right now it costs ~3% annually to be short USD against EUR. (Given the HUGE speculative long EUR futures position a lot of people seem to be willing to pay that cost but…IF the Euro starts to break down from current levels I think those specs become sellers.) Jerome Powell has his first FOMC meeting as Fed Chair next week. I think the currency and credit markets have been “quiet” ahead of this meeting because it could mark a “sea change” towards tighter Fed policy…and thus higher US interest rates and a higher USD.     

Also on my list was to short the US stock market. My bias is that the sharp break from All Time Highs in early February was a big deal and not just another Buy The Dip opportunity. With that in mind I was looking for a spot to get short if the latest rebound ran out of steam. I bought OTM S+P puts on Tuesday when the Nasdaq made new All Time Highs and then registered a daily Key Reversal Down. At the end of the week I’m marginally ahead on this trade but my conviction level is low (the market had a great opportunity to break but, so far, hasn’t taken it.)

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Last on my list was to short Crude Oil. I bought OTM puts on Wednesday when it looked like WTI could break below $ 60 (and perhaps set off a domino-like selling wave) but I covered the position for a small loss on Friday.   

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 Adair – Trade War Fears Trigger Market Moves

Victor Adair has had a superb month in Stocks, Currencies, Crude Oil and Gold. Here is his interview with Michael followed by Victors trading notes for this week and next – Robert Zurrer for Money Talks

The US stock market was a great barometer of risk appetite this week. The DJIA rallied to 3 week highs on Monday but began falling early Tuesday morning (Powell testimony) and was down nearly 1,600 points at Friday’s lows. The prospect of “trade wars” following Trump’s proposed steel and aluminum tariffs contributed to a high volume acceleration of the decline on Thursday. The major American stock indices all registered a Weekly Key Reversal Down.

For the past couple of months  my Trading Desk Notes have maintained that risk appetite was “dangerously high” and was due for (at least) a correction. I wrote that: Markets are in a blow-off phaseMy gut instinct is to fade this price action…but my risk management override says wait…it could get even crazier! The key aspect of market psychology so far this year has been a willingness to aggressively take on risk. I quoted Bob Farrell, “The public buys the most at the top and the least at the bottom.”

I’ve had 2 key reasons why I thought there could be a significant reversal in risk appetite:

  1. Looking at the charts I believed that the stock market “melt up” in January was likely the last leg of a parabolic blow off. The DJIA had quadrupled from the 2009 lows, had rallied 45% since the Trump election, and now the public was “beating down the doors” to buy anything and everything.
  2. The global central banks, which had “underwritten” the 9 year rally in asset prices, were in the process of “changing their ways.”

My short term trading: February was a good month for me as I caught parts of the “correction” in the stock, currency and commodity markets. I started this week short CAD and Euro, and bond puts, and added short gold and short S+P. I closed all of those positions with profits except for the bond puts which I closed for a small loss. I’m flat at the end of the week, but in my managed futures account that Drew manages we remain short CAD and WTI.

The US Dollar rallied to 6 week highs this week but then reversed sharply on Thursday  on “trade war” fears.

The Canadian Dollar broke its relationship with the Euro on Thursday…that is CAD kept falling against the USD while the Euro rallied. I think this points to REAL weakness in CAD…which is now threatening to break below the 7750 lows made last fall. The “trade wars” story has real impact on Canada as it pertains to the Nafta renegotiations. The 2 year interest rate spread is ~45 bp in favor of the US and markets may be anticipating “dovish” comments from the BOC at next week’s meeting. Markets are still pricing a 36% chance that the BOC will raise rates in April…I have my doubts!

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The Yen has been rising steadily since early January and ended this week at its best levels against the USD since Trump’s election. It’s often called a “safe haven” currency but it was rising in January even as the US stock market was soaring…so there’s something else in play…any unwinding of the massive short Yen positioning in the futures markets could accelerate the rally.

WTI has had a very similar chart pattern to the S+P so far this year…rising through January…falling the first 2 weeks of February only to bounce back the next 2 weeks. This week it rallied on Monday along with the stock market and then fell sharply with the stock market Tuesday through Friday.

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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

Featured Guest Mark Leibovit

Mark updates Mike on the long term Cannabis sector as well as some opportunities generated after the recent Dow Correction

….also Michael’s quote of the week: Einstein Kicks It Through The Uprights

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Buckle Up For a Major Sea Change

Victor points out that money is starting to move into the sold out Commodity sector which relative to stocks is down 75% in the last 7 years to an 18 year low. 

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