Trading Desk Notes - January 5thSubmitted by Polar Futures Group on January 7th, 2019
The leading US stock indices fell ~20% from early October All Time Highs to the Christmas lows (Dow down ~5,000 pts) but have bounced back about 8% (Dow up ~1,750 pts) as of yesterday’s close. Daily price action has been wild and choppy with 500+ point swings in the Dow seemingly routine. Implied vol levels on the major indices have tripled from their 2017 lows and are the highest they’ve been in over 3 years.
After the Fed raised rates on December 19th (and Powell said that balance sheet reduction was on “auto-pilot”) the Dow nosedived >2,000 points in 4 consecutive trading sessions.
People like Stan Druckenmiller had been calling for the Fed to stop raising interest rates and to reduce their balance sheet run-off rate because they saw signs that the US economy was already slowing dramatically. David Rosenberg argued that the Fed was tightening right into a recession...that he sees hitting the economy within the next few months.
If Rosenberg is right on his recession call then the bounce we’ve seen since Christmas is just a bear market rally and the market will roll over and make new lows. I’m flat at the moment but I’m looking for the bounce from the Christmas lows to run out of steam...if it does I’ll be looking to get short.
It’s a “new Fed” under Chairman Powell. With Greenspan, Bernanke and Yellen investors “knew” that the Fed would “ride to the rescue” if the stock market took a tumble...but with Powell they aren’t so sure. His October 3rd “long way from neutral” comment and his December 19th “auto-pilot” comment caused markets to tumble...yet his comment yesterday that the Fed would adjust the pace of the runoff if necessary took the Dow up ~900 points from Thursday’s close...and back above the close on that very important “Fed Day” December 19th.
I was bullish the USD for most of 2018...making the case that the “Stealth strength” of the USD Vs. off-the-run and EM currencies was an “early warning” sign of USD strength before the USDX began to rally in April. Now I’m wondering if the USD may be rolling over. Gold has been trending higher since mid-August when the USDX made an important top (yes, USDX rallied above that August top in November and December...but not by much...and it’s now at 2 month lows ) and a handful of EM currencies have been trending higher for the past few weeks (stealth USD weakness?) I haven’t taken a position against the USD recently (other than buying gold) but I’m leaning that way now.
The Canadian dollar rallied 1 ½ cents off 18 month lows (7350) this past week as both the US stock market and WTI bounced off their Christmas lows. CAD has been highly correlated over the last year with important turns in the US stock market and WTI (CAD turned lower with both WTI and US stocks at the beginning of October and tumbled with them into the Christmas lows...and is now bouncing with stocks and WTI.) I’ve been bearish CAD for years and remain that way longer term...but CAD, which has tumbled 12 of the last 13 weeks, may be rallying from a very oversold level.
Gold fell ~$200 (1360 to 1160) from April to August as the USD staged a strong rally. (Speculators turned net short gold futures in August for the first time in over 10 years – obviously asking themselves, “Who needs gold when the USD and the stock market are going up?”) Gold turned higher in August as the USD turned lower and then in December gold rallied $80 as the USD drifted sideways and investors bought gold as a safe haven while stocks tumbled.
My short term trading: I’ve traded the S+P from both the long side and the short side the past couple of weeks and have been lucky enough to make some money. I bought gold around $1240 in mid-December (before the Dec 19th Fed meeting) and sold it for $1285 this week when I thought the stock market tumble had run its course (for now.) I’ve kept my position sizes small through the turn of the year period, and I’m flat at the moment but I’m looking to get more active now that we’re into the New Year. I’ll be looking for opportunities to short USD and US stocks...if they give me signs that they are falling.