Trading Desk Notes July 19, 2019Submitted by Polar Futures Group on July 19th, 2019
Summer Doldrums??? Gold surging to a new 6 year high up >$50 in 3 days, Silver up 8% on the week, major US share indices hitting new All Time Highs with buybacks on pace for another record year even as China/US trade talks stall, Crude oil down 10% on the week on signs that US/Iran will talk...even as the Rumble in the Gulf ramps up, and then there’s Williams’, “be aggressive early,” speech 2 weeks ahead of the FOMC meeting briefly driving odds of a July 50bp cut to 70%. Yikes!
Gold rallied nearly $200 (16%) in 2 months with Comex open interest up 215,000 contracts (~50%) to a fresh 3 year high...with COT data showing speculators buying aggressively since the late May lows. Silver played “catch-up” with a vengeance this week jumping as much as $1.50 from last week’s close...but both metals corrected hard late Friday making this look like some kind of a blow-off top.
WTI crude oil had a $6.50 range between this week’s high and low...trading lower each passing day...to end the week at the lowest levels in a month down ~10% from last week’s close.
The currency markets were a “chopfest” this week...or a “tempest in a teapot” as they churned up and down within what seems to be an increasingly narrow range...surely we’re due for a breakout...one way or the other!
The Canadian dollar hit a 9 month high last week after rallying 3 cents off the end-of-May lows...but couldn’t make a new high this week...chopping back and forth within a ½ cent range. Open interest has surged ~65,000 contracts (CAD$6.5 Billion notional value) since June 19th with speculators buying aggressively...swinging from being net short to net long for the first time in 15 months. CAD mostly sustained it’s 3 cent rally this week even though WTI prices dropped ~10%...meaning that shrinking interest rate differentials with the USD and a “generally” weaker USD since late May have been the key drivers of the CAD rally (along with that aggressive spec buying!)
My trading “theme” for the past several weeks (see previous blogs) has been that the aggressive repricing of future interest rate expectations has been the “irresistible force” that has impacted all markets...and that this HUGE move has gone too far too fast and therefore we would see “mean reversion” trading opportunities across markets. Part of the “evidence” for this theme has been the MASSIVE flow of capital into all kinds of bond funds, new record highs in the amount of negative yielding bonds, negative yield curves, etc.
The end of the bond rally? Most runaway bull markets don’t just make a “Vee” shaped top and drop like a stone...there is almost always a failed bounce back following the initial break from the highs. That may be where we are on the bond chart if you see 157 as the top followed by an initial drop to 153. If the bounce back to 155 now rolls over and takes out 153 then we could see mean reversion trades showing up everywhere...not just in bonds.
My short term trading: I made money shorting WTI this week...gave a chunk of that back when I was stopped out of bullish USD trades (thanks to the “be aggressive early” speech from NY Fed president John Williams that drove the USD down) and had unrealized gains at the end of the week on short CAD and short S+P positions. I also remain short a nearby OTM WTI put that I had used to hedge my short WTI futures trades this week. If WTI is steady/better next week the premium should quickly evaporate out of that option...if WTI shows more weakness I’ll cover the position.
Trades I’m looking to make: If anything, it feels like the stage is set for volatility to jump. I’ll be looking at positioning risk for trading opportunities...meaning that I think a lot of recent positioning might have to be reversed...in the Bob Farrell sense of, “The public buys the most at the top!
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