commodities | Margin Rich

Pride Goeth Before the Fall? – A Performance Review of 2021

Posted on March 1, 2022 by Margin Rich

It’s been awhile since completing a review of market calls made here at Marginrich.com. As my general knowledge of market inter-workings and crowd psychology has refined over the past several years increasing in nuance and depth, now’s as good a time as ever.

Let’s start with accuracy percentage and a list of the articles with basic details. Then I’ll provide a quick, detailed breakdown of each call afterwards down below. We’ll work backwards from the most current post, skipping 2 posts where I don’t make any directional calls or predictions.

Nine of the 11 asset forecasts between December 2020 and December 2021 were correct, for an accuracy rate of 82%. Stellar by any definition, especially for a free blog written in spare time. Each forecast was actionable via options, futures, the underlying asset, or simply raising cash.

Forecasts:

1. Trading Brazil – 12/12/2021: The Brazilian Real would strengthen against the US Dollar and Brazilian stocks were about to be re-rated higher. (CORRECT)

2. Options Markets Muting Signals – 11/20/2021: Trapdoor underneath stock markets and potential for a large selloff in the near future. (CORRECT)

3. Insiders, Metaverse, and Options – 11/16/2021: Options usage too extreme; quick & shallow selloff felt very close. (CORRECT)

4. I Can’t Fight This Feeling – 10/24/2021: Commodities sentiment extreme and due for a selloff led by oil with a rise in the US Dollar. (CORRECT)

5. If Everybody’s Thinking Alike, then… – 9/13/2021: Technically, I stated the cannabis sector looked as if it might be basing for a potential up-move. I didn’t actually make a directional call, but I’ll still own it. Same goes for EWZ, for which I actually did make a directional call 3 months later. (WRONG)

6. Volatility Interpretation – 9/1/2021: Volatility was about to show its face in stock markets. (CORRECT)

7. I Don’t Know Why I Talk About Crypto in a Public Setting – 8/30/2021: Ethereum on the verge of another run upwards. (CORRECT)

8. The Best Part of Waking Up – 7/22/2021: A correction in coffee was imminent. (CORRECT)

9. Bitcoin – A Quick Technical Read – 7/16/2021: I thought BTC had one more puke-dip into the $20k range, anywhere between $21k and $29k. Major whiff. My article actually bottom-ticked that particular correction before BTC went on to return over 100% within 4 months. (WRONG)

10. Oil Taking Its Breather…Finally – 7/7/2021: Oil correction had begun (not obvious yet) and XLE would sell off accordingly. (CORRECT)

11. Beware the Secular Trend’s Short-term Counter Move – 12/28/2020: The Euro/USD pair had reached an extreme point and a USD rally looked primed, which would coincide with potential fear-events in the equity markets. (CORRECT)

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So that’s the quick and dirty. Keep reading below for a bit more detail and to view the charts better illustrating each forecast. Each chart will have a yellow circle denoting the date the article was published.

Trading Brazil:

Calls on EWZ were the chosen expression for this trade. Pre-tax return was 100% in less than 2 months. While everyone has been focused on energy, I focused on an EM component that looked ripe to provide a kickstart to 2022 trading.

Real strengthening vs the USD. Any reader could’ve bet futures here on the currency pair for a tidy profit.

Options Markets Muting Signals:

This particular article actually top-ticked the NASDAQ Composite, but I didn’t go short here. Hindsight being what it is, I should have, but instead I simply raised cash levels for the opportunities that are currently availing themselves.

My focus was on the NASDAQ in this article however one has to include the S&P 500 if one is going to comment on general equity markets. No top-tick as there was a bit more demand for the S&P 500, but within a matter of weeks, the trapdoor opened for this index, too.

Insiders, Metaverse, and Options

You could almost smell the move coming, like a turkey basting for hours. Then, Black Friday delivered a little fear for the unprepared. No trade here as raising cash was the strategy, and the ensuing rallies assisted with that process. Going short up until the past few months was a dangerous endeavor and understanding option flows was and is critical.

I Can’t Fight This Feeling

That little 11% jaunt downward in the underlying ETF over the next month resulted in a 135% pre-tax return on simple Put purchases. Of course, energy as a sector is a different beast entirely now, and along with inflation, the Russia/Ukraine conflict has put commodities front and center of the financial space again.

The US Dollar followed it’s typical anti-correlation to commodities by rising. Since that initial run upwards, it has chopped in this uncertain environment. I suspect the ultimate, long-term path is downwards for the USD, but that’s a philosophical discussion for another time.

If Everybody’s Thinking Alike, Then…

Ugh, what else needs to be said? This one is ugly. To reiterate, I did not actually make a directional call or bet here. I simply thought that the bear market in cannabis may be reaching a nadir. But investors and speculators had other ideas as the market pounded this ETF for an additional 50% loss subsequent to publishing the article.

Volatility Interpretation

The article literally bottom-ticked the VIX. Unfortunately, I didn’t directly trade Vol here. I used the ensuing volatility to pyramid some positions in the long portfolios.

I Don’t Know Why I Talk About Crypto in a Public Setting

Those percentages in the chart above were from the publishing date of the article (yellow circle). The actual moves were, 20% as annotated for the first ascent, then a quick 50% downdraft followed by a 75% spike. If you ignored ETH in 2021, or crypto period, then you missed some of the best trading opportunities of the year.

The Best Part of Waking Up

Coffee was the gift that kept on giving for about 4 weeks in late July through late August, before squeezing out of an old school pennant to what seems like non-stop upside. The initial trade was simple Puts on the JO ETF for a 40% pre-tax return in a week. Then I was able to scalp 20% in a week out of JO with some Calls before finally squeezing the last bit of Put juice for 10% in a week before THE breakout in coffee.

Subsequent to those trades, I did overestimate the extreme in buying-sentiment and underestimate the impact of the freeze in Brazilian crops. Consequently, I gave back a bit of the profit with additional Puts and failed to capitalize on the ensuing multi-month rally as a result of my bias. All additional lessons at a fair tuition price.

Bitcoin – A Quick Technical Read

I darn near bottom-ticked BTC with this particular forecast. So wrong! As BTC goes, so goes the crypto markets so it wasn’t long before I was pursuing the other opportunity as noted above. As has been said countless times by countless players, trading is all about managing risk (control losses & maximize gains).

Oil Taking Its Breather…Finally

Oil (West Texas Intermediate) was overdone. I top-ticked the high in July on the day of publishing and was fortunate to estimate an unsurprising 20% sell off in the commodity.

I favored Puts on the XLE as the expression for this trade and the market rewarded me with a 100% pre-tax return in under 8 weeks.

Beware the Secular Trend’s Potential Short-term Counter Move

I published this article in the midst of what felt like virtually everyone expecting the “obvious” demise of the USD. The dollar’s imminent demise down into the $80’s has since proven to be fallacious logic. Its haven status as the world’s reserve currency has kept it afloat and demand will probably keep it there for some time until internal and external geopolitical/economic events shift perceptions and capital flows.

Once again, the anti-correlated pairing could’ve provided currency traders with an exceptional opportunity. Admittedly, I failed to take advantage of this potential trade with a currency pair expression.

What I did do was expect more intense volatility. As such, I purchased hedges which ended up costing me insurance premiums as the S&P 500 simply chopped for a month before continuing onward and upward. Sure, I was correct about some volatility but wrong about the amplitude. Still though, I contend that the price paid for peace of mind was worth it.

It’s my sincerest hope that if you’ve read this full performance-review that my skills and experience are apparent. I’m not some wannabe, greenhorn daytrader posing as a professional. Although I mostly showcase my technical analysis skills here at the site, I’ve honed my fundamental analysis skills for all asset classes and sectors. Over the last 20 years, I’ve poured my heart and soul into building an amalgamated skill set around a professional-level understanding of investing, finance, banking, currencies, economics, accounting, business operations, sales, geopolitics, crowd psychology of markets, leading/managing/coaching, and asset management.

Now I’d like to test those skills in the appropriate arena. If you’re here just to have a read, I hope you’ve enjoyed. I’ll continue to intermittently share actionable thoughts. But if any readers from the professional, financial space are interested in how I can benefit their organization, please don’t hesitate to reach out. Email address is listed at the menu button in the upper-right of the screen. My LinkedIn profile can be accessed at the About page by clicking the hamburger in the upper-left of the screen.

Here’s to a fruitful 2022 for any and all readers of Marginrich.com.

I Can’t Fight This Feeling

Posted on October 24, 2021 by Margin Rich

Commodities have gotten white hot in a very short window. The sheer amount of headlines around inflation and raw material pricing is insane. I don’t have a nifty little Google Trends chart to show you but I’m pretty sure I already know how it looks.

Every other financial article or analysis is about inflation or commodity pricing.

Commodities are on top of everyone’s mind right now, which of course means a reversal is imminent. Which in turn should drive the buck upwards as commodities are priced in dollars and heavy amounts of short-term capital will have to hide there while steam is let out of this commodities rally.

Have a look at DBC. You can see when recent capital started jumping in enmasse as a result of commodity price action and the narrative heating up around inflation.

It’s all a bit too much, too fast. A correction may have already began last week and I wouldn’t be surprised at all to see DBC come off 15%. However, there are a ton of Calls outstanding on this ETF compared to the Put total with tons of theta purchased out to January of next year.

Gamma sways everything.

Still though, my gut tells me the narrative around oil and copper is simply too hot. I’m probably a bit early here, so if one were intending to go short on select commodities, be sure to purchase enough theta on one’s own Puts.

Just look at the raw YTD performance of the energy complex! And copper is easily outperforming the S&P 500 and NASDAQ.

A couple months back, I thought a harder selloff in the commodity complex might trigger selling action in the equity markets. Instead, equities took their own little breather in September as volatility rose.

But I don’t think we’re quite out of the woods with equity volatility. This “buying of the dip” has a delicate feel to it, as if fear was not properly washed out last month. I continue to stand by my hypothesis that commodity weakness will lead to general equity weakness.

Of course, the commodity weakness will be transitory along with any equity weakness. I expect to have a solid end of year rally in stocks.

Assuming my hypothesis is correct, oil and copper should be the triggers. Copper’s decline has probably already begun with last week’s 5% selloff (and more to come).

Oil would be the real trigger for overall weakness across markets. Observe this bit of backtesting on oil, courtesy of SentimenTrader. If the trend over the last 30 years holds true, then we should expect a rocky month in oil regardless of narratives and “shortages.”

Couple this with some end of month historical tendencies towards equity weakness, and we have the makings to pull the rug out from recent dip buyers.

From Tom Bowley of Earningsbeat.com via his weekly segment at Stockcharts.com,

One historical fact is that, at the close today, we will be entering the worst historical week of the year. The October 21st close through the October 27th close has a tendency to show weakness. Before I show you the numbers, keep in mind that the 19th through 25th of EVERY calendar month has produced annualized returns of -8% on the S&P 500 since 1950. So this October weakness is really nothing new. It just happens to be the worst of the bunch. Below are the annualized returns by calendar day (since 1950) on the S&P 500, followed by the NASDAQ:

But then these annualized returns are immediately followed up by historical strength in the S&P 500, so any weakness should be relatively short and shallow, but very scary. It is Halloween, folks. Observe the next 9 days of annualized results (since 1950) for the S&P 500:

Summing up: The inflation narrative and commodity pricing are too hot. Expect weakness there. This would then catalyze weakness in equity markets with overall weakness driving capital into the USD.

All sound far fetched? Have a look at the USD and performance when CoT shows Large Traders at a wide disparity to Commercial Hedgers.

Some hefty rallies noted. I don’t expect a monster run; just enough for a short-lived rally while capital hides. It’s only a hypothesis, but one has to trade their beliefs and manage risk accordingly. Can’t reiterate that enough.

If Everybody’s Thinking Alike, then…

Posted on September 13, 2021 by Margin Rich

While September’s seasonality, OpEx, and 7th straight month without a 5% dip has speculators on edge, if all the big banks along with many other outlets and mediums are calling for a correction, then can the markets have one?

Of course. Just enough time has to elapse since the calls of the last week for one to begin. When speculators have forgotten about the chance for correction is when a 5% – 9% dip can do its thing.

In the meantime, here’s a couple of opportunities worth considering regardless of where larger markets go this month.

Cannabis could be establishing a base from which to provide a nice little reversal trade. Let’s look at a weekly of MJ, the largest cannabis-themed ETF by AUM.

MJ seems to be finding nice support here at $15. If it can bounce here, then $21 looks like a solid resistance point. Between those 2 price points in the shaded area above is a confluence of various charting overlays & indicators. Should that bounce occur, there’s any number of ways to structure a trade within that range to take advantage.

The CAGR vector for revenues, margins, FCF, etc. across the MSOs is looking quite enticing. If the trading gods can deliver some political magic with a positive announcement of some sort around legalization, then you never know how spicy a trade might get.

And from the intra-week YTD high established in the 2nd week of February, MJ is down over 50%. Regardless of any wider market breadth issues, it seems like enough capital has fled the category and is ripe for capital to bounce back in. Overhead supply looks heavy between $22 – $24 so I wouldn’t get too clever pushing a move at the top of that shaded area.

The other potential trade setting up is in once white-hot Brazil. Heavy amounts of capital shifted into Brazil on the back of the commodity thesis earlier in 2021. It’s been shaken out a bit as EWZ has corrected 20% (intra-week) since late June.

It’s easy to see that the yellow horizontal line represents an important price point for speculators. And there’s a confluence of charty stuff, yada, yada, including a couple of intra-week bounces with longish wicks established in the past 4 weeks. The chart tells me that a bet on a 10% to potential 15%ish bounce might be in play. That’s just based on price action, but geopolitics and FX may hold more sway. Further assessment of risk is warranted, but a surf-able swell may be setting up.

Based on all the Wall St. banks jawboning about market weakness in the past 10 days, it appears the Fed is attempting to lubricate the transition into a tapering environment and get a little correction started. Just have to control volatility as an asset class and steam can be released with relatively little pain. But markets don’t work like that, right? Trade accordingly.

The Best Part of Waking Up

Posted on July 22, 2021 by Margin Rich

Wow, what an ignition for coffee. This all-important soft has shot up a rough 20% in three days as of today. That’s smoking momentum.

Props to those who are grabbing or grabbed a piece of that squeeze.

However, capital is nervous these days. One can feel it across multiple asset classes and sectors. That general nervousness could cause capital to quickly shift out of coffee and into some other asset bearing a superior portfolio correlation. The move this week feels like a firework as opposed to a rocket headed to the moon.

FinViz Daily Chart

And fireworks fizzle out. Now maybe this is a legitimate breakout. Destination? Moon. I don’t identify as a commodity market expert in any futures category so there are definitely legitimate fundamentals factors that I’ve spent zero time assessing.

In fact, I don’t identify as an expert in anything. I just like to surf the swells of extreme price action across various sectors and assets classes. Simple as that. Sometimes I win big. Most times I lose small. Just trying to net higher and higher.

Let’s zoom out to a monthly chart of coffee (FinViz Monthly with COT). The blue circles below show every time the big-money, savvy traders get a bit out over their skis against the smart-money commercials.

Over the last 16 years, it would’ve paid to heed this signal more often that not. In 2010, it was a total bust during that commodity super bull coming out of the GFC. But other than that, futures and options would’ve paid out nicely betting on a sharp change in trend.

I’m a simple man. Simple mind. Simple life. Simple trading tactics, and Puts on the JO ETF could provide a solid reward to risk if a reversal is essentially imminent.

The spreads suck, but there’s enough liquidity. If coffee is to see holders start grabbing profits just as fast as they’ve made them, then the zone highlighted in yellow below looks like a logical place to explore opportunities.

Ideally, we’d like to see profit taking tomorrow (Friday 7/23/2021), in order to add a wick to the top of the current weekly candle.

Again, beware of that price action in 2010. And the Great Mother asks you to kindly stop brewing your morning drug with single-use plastic pods.

Oil Taking Its Breather…Finally

Posted on July 7, 2021 by Margin Rich

For traders who’ve been waiting oh so patiently, it genuinely appears an oil sell-off has begun. Discretionary trading requires sound, subjective judgement which comes through diligent research and a practiced hand. Do I have any of that? It’s certainly questionable, but you’re here reading so let’s get to the squiggly lines.

There’s a massive confluence of moving averages, Bollinger Bands, and indicators on a weekly chart signaling a sell-off could have some legs, at least temporarily. Have a look at the monthly chart of West Texas Intermediate (LC). That horizontal yellow line represents a very good stopping point should momentum build to the downside as H1 P&L’s get protected.

A 20% correction in oil would not surprise me. This coincides with action and positioning in the US dollar. For event-traders, OPEC+ activity has definitely raised hackles so I suspect stops have been pulled up pretty tightly which can exacerbate a move to the downside.

On the monthly chart above, since the bottom of that negative-price move in April 2020, hi-to-lo oil is up 1000% in 15 months. It’s up 350% using closing prices, and hell, it’s up 135% since November.

We did get a 15% correction starting in March that began a little consolidation period from which oil has recently broken out.

I suspect that June breakout drew in a bit of newer capital that failed to position earlier and could be chasing in addition to pyramiding by existing position holders. Feels like a false breakout from that wedge. Commodities across the complex have all been taking breaks, but not the King of Commodities. Consolidation yes, but no true breaks.

I’m of the persuasion that a commodity super bull has legitimately begun. But that thesis ran so white hot with nary a breather, that now it’s time for the granddaddy of the commodity complex to kick up its legs for a minute. Any multitude of ways to go short.

One of the methods I like is Puts on the XLE. Vast liquidity with excess positioning will allow for a potent ROI on a well-timed swing.

That horizontal yellow line on the weekly XLE chart also represents another good confluence of moving averages, bands, volume@price, etc. Use any spread methodology desired within the options complex, but $45 looks like as good a point as any for a possible bottom and a consolidation to begin.

As usual, I’m handicapping here. This is a personal bet just for me and no others using my own proprietary methodologies that have consistently given me an edge. Risk management is always the key to a successful trade. I use a mix of technicals, fundamentals, and anecdotals that all get swirled around the noggin until the organic computer kicks out a trade suggestion just for me. Then I write about it on a site nobody reads anyways to help me flesh out and think about the theses a bit more.

If you’re somehow reading this content, it’s not a trade or investment recommendation. I’m just thinking out loud.

Commodities and stocks have just been on a tear in 2021. Performance as such for both the S&P 500 and BCOM has occurred a handful of other times in financial history. It tended not to bode too well for commodities over the next couple of months. Observe the following chart from SentimenTrader.

Sample size not withstanding, with oil and natty combined being the largest component of the BCOM, a short thesis just might profit.