Trading Desk Notes March 7, 2020Submitted by Polar Futures Group on March 6th, 2020
At market extremes you are trading nothing but psychology. So...is it time to sell panic? Or is the hysteria just beginning? What’s your time frame? What’s your pain threshold? Volatility has exploded as liquidity has vanished. Bid/offer spreads are wide but not deep. Credit spreads are widening. The 10 year UST yield has dropped from ~1.6% to ~0.8% in just 12 trading sessions. In the same time frame gold is up ~$100, WTI is down ~$12 (a 4 year low,) the S+P is down ~500 points and the US Dollar Index has tumbled from a 2 year high to a 1 year low. The CNN Fear/Greed barometer is at 5.
My view has been that the virus was a catalyst for an accident waiting to happen...people had been rewarded for taking on risk...reaching for yield...so they took on more risk...and then risk happen WAY faster than nearly anybody had expected.
S+P futures were at All Time Highs 12 trading sessions ago. In 7 trading sessions the spooz dropped >16%...recovered ~50% of that drop in a couple of days and then turned lower again.
There’s an Island Top in MSFT that may symbolize the “topping out” of the 10 year stock market rally.
10 year Treasury futures have soared in price as yields have tumbled.
The US Dollar Index hit a 6 month low at the end of 2019...then rallied to a 2 year high in just 6 weeks only to turn sharply lower at exactly the same time as the US stock market began to fall from All Time Highs.
WTI made a spike high above $65 on US/Iran tensions in early January but has tumbled ~37% since then on worries that the virus will slash global demand...on the inability of OPEC+ to agree on production cutbacks...and on liquidation of huge long spec positions.
Gold rallied to a new 7 year high as interest rates, the stock market and the USD fell.
The Canadian Dollar fell to a 6 month low this week when the Bank of Canada surprised the market with a 50bps cut...and as crude oil tumbled to a 4 year low.
My short term trading: I started the week with a deep ITM bearish S+P put spread. I still hold that. I also still own a bearish gold put spread. The huge volatility ramp across markets this week increased the gold option values even as gold rallied. I may close the spread at a small loss or leg out of it. I was short Yen over the weekend as a play on stocks continuing the previous Friday rally. I covered that position for a small loss Tuesday. I bought MEX at the end of the week as a play on panic subsiding. MEX has tumbled with the stock market the past 2 weeks but Mexico has a huge yield advantage over the USA and if panic subsides I’d expect to see capital flow to Mexico.
I sold panic a few times this week...looking for stocks to bounce and bonds to fall. I used very tight stops and ducked several large bullets but had small net losses on the week. My main mantra is to preserve capital. Live to trade another day. Selling very high volatility was tempting...but it was difficult to manage risk on the trades...and managing the risks on my trades definitely overrides any fantasies I have about having a great crystal ball!
My son Drew Zimmerman and I use the futures market to trade currencies, metals, interest rates, stock indices, energy and other commodities. Please give us a call or send us an email if you'd like to know more about trading futures.
SVP and Derivatives Portfolio Manager
PI Financial Corp
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