Trading Desk Notes - October 27thSubmitted by Polar Futures Group on October 26th, 2018
Stock market price action was an emotional rollercoaster this week with big intraday price swings. The DJIA fell ~2,500 points (9.5%) from All Time Highs in early October to Friday’s lows. Stock markets around the world were under pressure as they keyed off American markets which were “catching down” to the weakness many other markets had been hit with over the past several months. The TSE peaked in July and started to fall with the decline accelerating in October. At this week’s low it was down ~ 11.5% from the peak at a 2 year low as resource stocks, bank stocks and cannabis stocks all fell.
Of course nearly everything looked terrific when the major American stock market indices were making All Time Highs in late September. The unemployment rate was the lowest in decades, small business optimism had never been higher, consumer confidence was off the charts, restaurant sales were booming, the Fed was gently raising interest rates because the economy was so darn strong...and then things changed. People began to notice divergences...a small group of stocks were soaring while a lot of others were slipping away. American indices were at All Time Highs but Asia (ex-Japan,) Europe and especially EM had been trending lower for months. Short term Treasury yields were above the S+P dividend yield for the first time in a decade and bond yields had broken out of a 35 year downtrend.
The swing from greed to fear accelerated as October rolled along and prices picked up speed to the downside. There were lots of things to worry about...there always are...but now the worries seemed to reinforce one another...Peak Earnings, Mid-Term elections, Trade Wars, China, Italy, Brexit, Saudi, Trump taking shots at the Fed...last week I wrote, “My current sense of stock market psychology is that the bulls are beginning to wonder if they should be taking profits and the bears are sensing opportunity.”
In my short term trading accounts I’ve been shorting the S+P (buying puts) during October based upon my sense of Market Psychology. I came into this week short...took profits and, late in the week, began to (very cautiously!) bottom pick the market with call option strategies. The key positions in my managed account have been bullish USD and bearish WTI.
The US Dollar Index has been trending higher since mid-September and came close to making a new 15 month high this week. Currency markets have been relatively quiet compared to the wild price action in the stock markets but the overall “risk off” sentiment across asset classes has been USD positive.
The Canadian Dollar rallied Wednesday on a seemingly more-hawkish-than-expected Bank of Canada but fell back more than a full cent from Wednesday’s highs to Friday’s lows. CAD ended the week little changed.
WTI Crude Oil hit a 4 year high the first week of October with bullish sentiment (talk of $100 oil) focused on the possibility of a global shortage due to American sanctions on Iran. Crude trended lower with the stock market and hit a 2 month low this week...down over $11BBL (14%) from the recent highs. We took profits this week on the WTI puts held in the managed account for over a month. Western Canada Select prices continued to struggle trading under $20 per barrel this week.
Gold hit a 19 month low in mid-August but has rallied ~$80 from those lows (to a 3 month high) even as real interest rates and the USD have been rising. For the past 2 weeks gold’s strength has been directly tied to “safe haven” buying as the stock market fell. It’s interesting to see the relationship between the Euro and gold (as the Euro goes, so goes gold) totally reversed over the past 2 weeks. Gold shares fell sharply this week along with the stock market despite higher bullion prices. I’ve cautiously bought OTM gold puts this week thinking that any bounce-back in the stock market would see gold prices fall.