Welcome to September!

 In Trading, Uncategorized

This post was originally published to clients on September 2, 2016 – since then volatility is on the way up – a very welcome sign for traders everywhere.

I have added in and updated some charts/commentary.

Traders,

Summer will be a distant memory in the next week or so and with that will come the possibility of some robust trading conditions. These will be welcomed by all traders, but especially to those that have been in the business a long time and can truly appreciate how unique and challenging the current environment is.

The reason is simple: volatility – or lack of.

My World View In Less Than 500 Words

Let’s review.

  • The graphic below is from back on August 26th. The count now extends to 35 days without a 1% move.

8-26-16qod

  • I can take it even further and show that on a longer-term basis. Back on May 21st I posted this data nugget:

Traders, and investors need volatility in order to create opportunities. A stagnant one way market creates complacency and a false sense of ones ability to manage returns.

Everyone is a genius in a bull market. Ask any non-professional how they ended up after the 2000 and 2008 debacles. You get the point.

Sadly, we have a similar situation setting up again. However, just like any forthcoming market dislocation, it is very tough to time. But if you pay attention and remain patient, you can be very tactical and avoid a nasty draw-down or even make a tidy sum when everyone else is losing their heads and wondering what the hell just happened.

Additionally, knowing the catalysts that will cause this dislocation remain a bit vague too. Sure, there are countless red flags and thus they need to be monitored on a regular basis.

  • Investors piling into low volatility funds
  • Institutions reaching for yield by selling VIX to collect premium – wow – disaster in the making. As Raoul Pal states: “Suppressed volatility leads to hyper volatility.”

Source: Global Macro Investor and The Felder Report

  • A serious spike higher in bond yields. Too many investors are piled to one side of the ship. A push higher in yields could quickly feed on itself and cause some serious issues
    • This is now a very real situation. This commentary/chart is from Friday September 9th:

Good morning traders.

The chart below is a good way for us to start our day – it may well have an impact across all asset classes….or like many other developments, fall on deaf ears. Regardless, being aware is far better than having ones head buried in the sand.

Since the July lows, 10-year Treasury yields have jumped about 22%, a big number for sure. However, a move from 1.3% to 1.6% is not exactly a huge deal in terms of borrowing costs.

Nonetheless, yields are again pushing higher. If the chart below is correct, we are set for another 12% pop higher in yields.

At some point this might matter….let’s see.

9-9-1610target

  • Recession. No recession since 2009? Stunning. A matter of when; not if. The ISM continues to hover at the key 50 level. A break below there would certainly be a heads up.
  • Equity valuations – regardless of how you decide to measure them are rich…very rich. Sadly this is not a timing indicator, but one that has to factor into your daily analysis. At some point valuations will matter. Buy and hold investors should keep this graphic posted to their computer.

  • In the US, many key pieces of economic data remain weak/stagnant or are actually moving lower. Granted, this has been happening for some time, but at some point the disconnect between prices and economic activity will matter. Yes, I realize extremely unorthodox monetary polices will allow this slow motion train wreck to persist for some time, but that does not mean one casts caution to the wind.
  • 3-month LIBOR has tripled from .20% to .58%. Yes, still a paltry rate, but a massive impact if you are over leveraged or seeking capital.

Hello September

So there you have it. The global markets in a nutshell. Not pretty and certainly not priced for enough upside price action to offset the risks in my opinion.

However, why would you want to take the conventional route and pile into index funds or the like?

There will/are trades – many of which we are currently in, that make a lot of sense. This market requires one to be tactical and I see no reason to alter that approach anytime soon.

So let’s take a look at what is or could be my radar screen.

S&P 500: we have been long via both PDP and IWM for a while now and have our stops ratcheted up to protect profits. Regardless, I see some further upside. Not my favorite trade, but ignoring the trend despite deteriorating fundamentals is tough to ignore. I spoke more about this idea of being long in adverse conditions in my recent interview on RealVision TVyou can view it here.

I would be remiss however if i did not offer an additional note of caution. Would I buy the S&P’s from current levels? Probably not. Would I buy a pull-back as a trade? Perhaps.

The fact is, stocks are a lousy risk/reward trade in here. If I/we were not long from really attractive levels in PDP and IWM I would not be on board here.

NOTE: we were stopped out of PDP and IWM yesterday for solid gains of 1.31% & 8.98% respectively)

Add to that this data nugget from Nautilus Capital.

September is the cruelest month for stocks.   From 1928 to the present, it sports an average loss of -1.09% and is the only month down more times than up (39 up vs. 49 down).

The Dollar Index (DXC) FX is a game of which currency is the least ugly. In 2016, that would be the US dollar. At some point DXC will break higher – timing it though will be tough.

NOTE: I am now pretty much neutral on DXC for the time being. The longer-term trend, rate of change and seasonals are not aligned with dollar bulls.

EUR/USD: if DXC breaks higher, EUR/USD has to break lower. Plus, if you factor in the rapid rise in 3-month LIBOR, it is a rather bearish backdrop for EUR/USD

USD/SEK: the chart says all you need to know. A nice thrust higher from a triangle.

USD/JPY: long-time clients know that this pair is a big pain in the ass to trade. Most traders I know share a similar sentiment. Regardless, longs in USD/JPY could be a massive winner in 2016/2017

Crude Oil: we were short USO from May 17th and closed it in August for a great total return. However, as the chart below suggests, it looks poised to move lower again. I will be alerting clients on when to get short either via being short the stock or via a put spread of some sort.

10-year Treasuries if this back up in yields plays out it will be good and bad news. Good news in terms of it creating a catalyst in the market that should allow for some pretty robust trading conditions across all asset classes. Bad news from the standpoint of the impact it will have on the over-leveraged economy. All the more reason investors need to be tactical in here not fully invested lemmings.

9-9-1610target

More to follow as markets get ramped up again next week after the Labor Day holiday.

Feel free to send me your thoughts and questions.

Take care,

Dave

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