Trading Desk Notes May 9, 2020Submitted by Polar Futures Group on May 8th, 2020
Stock market indices rallied this week...lead by the Nasdaq index which is now up ~4% YTD after being down ~25% YTD at the March lows...volatility metrics keep falling and the open question is, “How will the “re-opening” play out?”
Stock market investors seem to be anticipating that the “re-opening” will play out just fine. Massive job losses and business shutdowns will be quickly reversed. Virus remedies and vaccines will likely arrive in short order and we will return to normal. US/China tensions have eased after last week’s “punish China” spat...this week’s trade talks have been cordial with both sides planning to implement the Phase One trade deal. The President is focusing on firing up the economy and the Fed is on watch in case anything goes wrong. What’s not to like?
Credit markets seem to be taking a much different view than the stock market...Fed Funds futures actually traded tiny negative this week and the 2Y Treasury yield fell to an All Time low of 0.01%.
The US Dollar Index soared as stock markets tumbled into the March lows...but then fell sharply when the Fed announced massive stimulus. Since then it’s been a confusing chop fest...although it has continued to be very strong against Emerging Market currencies. The Brazilian Real is down ~30% YTD.
My short term view has been that deflation prevails...that the stock market rally off the March lows has been a bear market rally and I’ve been shorting the Russell 2000 small cap index. Small positions, tight stops, selling on strength, taking profits on breaks. If this market does not take out last week’s highs and falls through this week’s lows I’ll get more aggressive on the short side. It’s possible that the Russell will be bought as a “catch-up” play as it has lagged the other indices. I’m also aware that the consensus view on stocks appears to be bearish so the “pain trade” will see the rally continue.
For more insight on my current thinking please check out the podcast I recorded May 6 and posted to The Trading Desk Notes section of www.PolarFuturesGroup.com I talk about how I decide what to buy and sell, when to take a position and how I manage risks. I discuss specific markets, and note that the CME allowing WTI to trade negative might have been the “Lehman Moment” of the current crisis...as investors suddenly realized that they are exposed to WAY more risk than they had previously thought. I also discuss de-globalization and how that may dramatically increase cooperation between Canada, the United States and Mexico...and how this “virus crisis” may have triggered not only a major transition in markets but also in societies’ relationship with government. If, for instance, people lose confidence in government that would mean much higher interest rates.
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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