Trading Desk Notes - Dec 2Submitted by Polar Futures Group on December 5th, 2017
From the desk of Victor Adair
Volatility jumped this week: Last week the VIX briefly dropped below 9%...a 24 year low...but ramped up throughout this week to a 3 month high above 14.5% on Friday as markets focused on political developments in Washington. The DJIA experienced 400+ point ranges both Thursday and Friday with choppy price action on “will-they-won’t-they” tax reform issues.
Stock Markets: All of the major US stock indices soared to new highs this week while the major European indices fell. The EuroStox50 hit 2 ½ month lows down ~5% from month ago levels. The Emerging Markets indices also fell with particular weakness in Asia-ex-Japan.
Currencies: The US Dollar index steadied after last week’s declines as the major pairs chopped around in narrow ranges. The Fed meets in 2 weeks and is expected to raise s/t interest rates by ¼%.
The Canadian Dollar: Fell ~1.4 cents Monday to Thursday but recovered all of those loses following Friday’s much-stronger-than-expected employment report. CAD has traded sideways in a 1.5 cent range for the last 5 weeks. The Bank of Canada meets next week and is expected to leave interest rates unchanged. The USD has gained over 5 cents against CAD since the Sept 8 Key Turn Date as the 2 year benchmark Gov’t interest rate spread has swung from ~25 points premium Canada to ~30 points premium USA. WTI rallied from ~$49 to ~$59 (20%) in that same time period but seemed to give CAD little support.
Gold: has chopped around in a $30 range between $1270 and $1300 for the past 6 weeks after tumbling ~$100 from its September 8 highs to its Oct 6 lows.
Crude Oil: OPEC-and-Allies extended their production cutback agreements, as expected, until the end of 2018 (with Libya and Nigeria agreeing to cap production.) Front month WTI hit a high of $59 last week on anticipation of this agreement and mostly sustained those gains this week to close above $58.
My short term trading: I had gone flat ahead of the American Thanksgiving long weekend. I sold CAD on Monday thinking that 1) the USD sell-off of the previous 3 weeks had run its course, 2) CAD appeared to have doubled-topped in November around 79 cents so I had a technical backstop, 3) I expected interest rate spreads to continue to widen in favor of the USD and 4) I also thought WTI might be having another “As Good As It Gets” moment around $59 and any break would be a drag on CAD. The trade looked good Wednesday as CAD dropped through the previous week’s low (77.90) and I anticipated that downside momentum would accelerate if CAD could break below the Oct low (77.45). I trailed my protective stop down as the week progressed and was stopped out at 7799 moments after the WAY stronger than expected Canadian employment report Friday morning.
I sold the S+P Wednesday after it fell back from All Time Highs, as the Nasdaq was falling hard. I thought the overall stock market was overdue for a “correction” but since I was selling into a strong uptrend I kept my size small. I saw some daylight on the trade during the Wednesday day session but was stopped overnight for a small loss before the market exploded higher Thursday.
Reviewing my trading activity I see the CAD trade as a well-managed trade that resulted in a profit. The S+P trade, however, was more of a “got a hunch / bet a bunch” style trade (even though I didn't bet a bunch!) that had a low probability of success. I managed the risk on the S+P trade by taking a small position and using a tight stop...but it was impetuous rather than well thought out and diminished the profits I earned on the CAD trade.