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Trading Desk Notes: Tesla, Indices Soar, Big Moves In Forex, Commodities Calm |


Tesla soars; stock indices hit new All-Time Highs

(NASDAQ:)’s market cap was ~$1.14 Trillion at the end of October—up ~$340B for the month. $340B is more than the total market cap of 481 of the companies in the . Massive buying of (very) short-dated call options helped accelerate this week’s rally following Monday’s news that (recently bankrupt car rental company) Hertz (OTC:) would buy 100,000 Tesla cars over the next 14 months; an order valued at ~$4B.

Tesla Weekly Chart

Tesla Weekly Chart

The broad market indices were inspired by the Tesla rally and closed the month at new All-Time Highs. The and the were up ~7% in October – their best monthly performance YTD.

Emini S&P, Daily Chart

Emini S&P, Daily Chart

Short-term interest rates are sharply higher, yield curves are flatter

Most “Western” Central Banks have maintained that inflation was “transitory,” but recently, some of them (BoE, BoC, RBNZ, RBA) seem to be changing their minds. They have started to reduce (or halt) QE programs and have begun to raise interest rates or pencil in increases for 2022. The Fed is expected to announce formal plans to reign in their QE program at this week’s scheduled .

Yield Curves Chart

Yield Curves Chart

Yield Curves Chart

Yield Curves Chart

Bond yields trended higher after hitting All-Time Lows in August 2020, but they have been steady/better recently, while short rates have soared, causing a dramatic flattening of the yield curve. The “street” has been hugely bearish of bonds (while analysts like David Rosenberg and Lacy Hunt have been bullish) mainly because of inflation fears. Is the flattening curve a sign that the bond market sees weaker economic growth ahead? Does the bond market fear that CBs may be tightening into a recession?

Bond Allocation

Bond Allocation

Inflation Rates

Inflation Rates

Big moves in the currency markets

The hit a 13 month high three weeks ago, slipped lower for the next 12 days, but closed the month with a powerful rally on Friday. COT data as of Oct. 26 show that net spec positioning remains long the USD Vs. most currencies—especially against the and the .

Dollar Index Daily Chart

Dollar Index Daily Chart

The Euro is ~58% of the USDX, and the chart is virtually a mirror image of the USDX. However, since mid-September, the Euro has plunged Vs. the and the .

EUR/CHF Daily Chart

EUR/CHF Daily Chart

EUR/GBP Daily Chart

EUR/GBP Daily Chart

The Japanese Yen has been especially weak against the USD (down ~10% YTD) and down 5% since mid-September.

JPY Weekly Chart

JPY Weekly Chart

The is one of the few actively traded currencies that has rallied against the USD this year (the Russian and the Chinese are also up YTD.) The CAD rallied nearly a full cent following the surprise tightening from the BoC on Wednesday (CDN 2Y yields now ~1.05% Vs. US 2Y yields at 0.52%), but the CAD could not sustain those gains as the USD surged Vs. all currencies on Friday.

CAD Weekly Chart

CAD Weekly Chart

Canada Policy Rate

Canada Policy Rate

The red-hot commodity rally takes a breather

touched a 7-year high last week around $85 but fell back ~6% at this week’s $81.50 lows. Chinese coal and iron ore prices are sharply lower. US prices have fallen back a bit after hitting 13-year highs, while UK prices are down ~60% from the record highs hit four weeks ago—albeit at prices that would have been All-Time highs six weeks ago.

WTI Crude Oil Price Seasonality

WTI Crude Oil Price Seasonality

Crude Light Daily Chart

Crude Light Daily Chart

ICE UK Nat Gas Weekly Chart

ICE UK Nat Gas Weekly Chart

My short term trading

I started this week flat—but per the “on my radar” section of last week’s Notes, I was looking for an opportunity to short stock indices. I sat through the (Tesla-inspired) rally during the Monday day and overnight sessions. I shorted the S&P on Tuesday after it fell back from ATH, bounced and then slumped lower. In a short-term time frame, I was selling a market that was falling away from a lower high.

The market fell overnight Tuesday, dropping below both the Monday overnight lows and the Tuesday day session lows—my trade seemed to be working. However, the market couldn’t sustain the breakdown, so I covered my position early Wednesday for a slight loss.

Emini S&P, 60 Min Chart

Emini S&P, 60 Min Chart

I shorted during the Thursday day session (the Dow looked to be the weakest of the NAZ, S&P and Dow indices) only to have it rally strongly into the close on earnings announcements. I held the position overnight and saw the market drop slightly below my entry price, but, once again, the market had an excellent opportunity to sell off—but didn’t take it! I covered the trade for another small loss early Friday day. I’m flat at the end of the week. My P+L is down ~0.20% on the week.

Emini Dow, 60 Min Chart

Emini Dow, 60 Min Chart

In hindsight, my bearish bias was wrong. The NAZ, S&P and Dow all rallied this week. The good news was that I kept my losses very small.

On my radar

Stock market sentiment (at least in terms of put/call buying) is exceptionally bullish. and (~10% of the S&P market cap) had disappointing earnings reports. Seasonality, buybacks and capital flows are bullish. This week, the Fed statement could jolt the market (the Toronto stock market fell hard on the BoC hawkish surprise.)

Puts Chart

Puts Chart

Seasonality 1985-2019

Seasonality 1985-2019

US Share Buybacks

US Share Buybacks

Tweet

Tweet

It was unusual to see the USD and the US stock market both strong on Friday. For the past two months, the correlation between the USD and the stock markets has been strongly negative. Maybe the FX market had a month-end rebalance—or perhaps the FX market has a different “take” on the coming week’s Fed meeting.

Like last week, I’ll be looking for opportunities to fade irrational exuberance in stocks and commodities. I won’t sell new highs, but I’ll look to shoot markets in the back if they have started to fall! (h/t Bill Fleckenstein.)

Thoughts on trading – using and moving stops

My friend Peter Brandt says that his net profitability, over time, is much more a result of how he manages his trades—not why he entered the trade. I agree, and like Peter, my trading style results in many small losses (hopefully no significant losses), lots of slightly bigger winning trades, and the occasional big winner. (Peter says that 100% of his net profits, over time, have come from only 15% of his trades.)

Stops are a vital part of my trading process. I develop a bias on the market, but I will wait for price action to create a setup before I take a position. (I won’t trade a market that I know nothing about solely because price action has made a good setup. I realize that some very successful traders can trade a SYMBOL without knowing what is behind the SYMBOL, but that approach doesn’t suit me; maybe someday I’ll change.)

Let’s say my bias is that irrational exuberance has taken the stock indices too high too fast, and I think they are at risk of a reversal. (My bias comes from a variety of technical, fundamental, sentimental and intuitive inputs.) I won’t sell stock indices simply because I think they are “over-valued”—they could quickly become more over-valued. (I’ve never been short Tesla.) I want to see the market turn down before I get short. (Turn down means different things in different time frames—I try to keep the time frames of my…



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