Trading Desk Notes October 3 ,2020Submitted by Polar Futures Group on October 2nd, 2020
Successful trading means positioning for what you think will happen...not for what you hope will happen. When it comes to analyzing the market impact of political developments we therefore focus on what we think will happen rather than on what we wish would happen.
We think the Trump/Biden “debate” probably hardened Wall Street’s (previously held) view that Biden will be the next President...with the caveat that a close vote or a delay in counting ballots will increase the chances of a contested election...and Wall Street definitely doesn’t want that...”just get it over with so that we know what we’re dealing with.”
From a market perspective Trump’s infection keeps the spotlight on the spread of the virus...which has no available vaccine...which likely means a continuum of the virus knock on effects such as lock downs, business failures, layoffs, social distancing...and government wrangling over providing further stimulus.
The virus has been a great disruptor...and even though people have learned a lot about how to deal with it...it hasn’t gone away...so some “temporary” disruptions (such as “working from home”) may become quasi-permanent...with a cascade of cause-and-effect results providing great opportunities for traders.
We believe market prices move “in anticipation”...people expect something to happen and they price that in...hence the old adage of “buy the rumor and sell the news.”
We’ve been trading WTI from the short side since this summer “in anticipation” of other folks beginning to see that crude oil is a lack-of-demand story and that prices would fall. Our base view has been that one of the cause-and-effect results of the virus has been a significant reduction in the demand for transportation fuels...and that producers (in need of cash flow) have not cut back production enough to balance supply/demand. We’ve made some decent profits...and remain short.
Last week we thought that the sell-off in the equity market from the KTD was due for a bounce off support around 3200 and we bot the S+P Friday. We closed the position for a 100 point gain Tuesday ahead of the debate...concerned that the debate could trigger a sharp sell-off...and because we are really looking for an opportunity to get short equities again...thinking that the ~10% decline from the KTD may be just the first leg of a bigger move lower. We’re cautiously short the S+P at the end of the week.
We also bought gold last week (after trading it only from the short side the last several weeks) thinking that after breaking the Aug/Sept lows it could have a bit of a bounce along with the stock market (fellow travelers to some degree lately.) We sold the position (too early) this week for a modest gain but also because we think the bigger short term move may be lower...especially if the USD gets bid and equities fall. (On the chart: what used to be support may now become resistance.)
The US Dollar Index was very strong in the late March panic but was then sold relentlessly from the March highs to the early September KTD. We think the USD remains a “safe haven” currency and expect it to rally now that it’s corrected from last week’s highs...especially if equity markets takes another leg down. (What used to be resistance may now become support – also possible H&S bottom.)
The Euro Currency was the main beneficiary of the “flight” from the USD during the March to September period. Futures market data shows that speculators were very net bearish the EUR in March and then swung to being All Time Record net bullish the Euro by August. This is important because if the EUR continues to drop from the 28 month high it made on the September KTD those bullish speculators may have to throw in the towel on their positions exacerbating the decline. We’re short EURUSD at the end of the week. (Technical view is the inverse of USDX.)
The Canadian Dollar hit a 4 year low ~68 cents during the March panic and rallied all the way to 77 cents by the September KTD as the USD fell and stocks and commodities rallied. We think the CAD is likely to slip lower (falling WTI has a magnet effect) and are short at the end of the week.
Copper had a HUGE tumble on Thursday and a very substantial bounce back on Friday. (A lot of markets have been choppy lately but this was amazing 2 day price action.) Our thoughts on Thursday was that speculators had become hugely bullish copper as it rallied ~50% from the March panic lows (copper is the metal-of-the-future-because-
We’ve shown a number of markets that “turned” on the early Sept KTD (red circles) in previous blogs and again today. Our contention is that if a number of different markets all reverse course on/around the same date then the “turn” is much more significant. Here’s two more markets that had an early September KTD: 1) the TIPS market shows real yields reversing higher (bonds down / yields up) from record lows and, 2) the CRB Index shows a broad basket of commodities reversing lower after ~30% rally from the March lows.
The mountain of cash that has been sitting in money market funds (~$7 billion) seems to be starting to come off the sidelines...but doesn’t seem to be flowing into equities. Given that new and existing home sales are at record levels and mortgage rates are at record lows maybe residential real estate is the beneficiary.
October 3, 2020 is the 30th anniversary of the reunification of Germany...which took place about a year after the Berlin Wall fell. We would have loved to have been at Checkpoint Charlie when those folks from East Germany came through the wall...we would have loved to have been there when people began tearing down that wall with their bare hands...and we would have loved to have been there in June 1987 when President Reagan gave his “Tear down this wall” speech.
If you’d like to know more about using the futures and options market to trade currencies, metals, interest rates, stock indices, energy and other commodities please contact Drew Zimmerman at PI Financial Corp in Vancouver.
PI Financial Corp. is a Member of the Canadian Investor Protection Fund. The risk of loss in trading commodity interests can be substantial. You should therefore carefully consider whether such trading is suitable for you in light of your financial condition. In considering whether to trade or the authorize someone else to trade for you, you should be aware of the following. If you purchase a commodity option you may sustain a total loss of the premium and of all transaction costs. If you purchase or sell a commodity futures contract or sell a commodity option or engage in off-exchange foreign currency trading you may sustain a total loss of the initial margin funds or security deposit and any additional fund that you deposit with your broker to establish or maintain your position. You may be called upon by your broker to deposit a substantial amount of additional margin funds, on short notice, in order to maintain your position. If you do not provide the requested funds within the prescribe time, your position may be liquidated at a loss, and you will be liable for any resulting deficit in your account. Under certain market conditions, you may find it difficult to impossible to liquidate a position. This is intended for distribution in those jurisdictions where PI Financial Corp. is registered as an advisor or a dealer in securities and/or futures and options. Any distribution or dissemination of this in any other jurisdiction is strictly prohibited. Past performance is not necessarily indicative of future results