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

Right now the markets are at extremes.  Essentially all of them.  Current price action across a broad swath of sectors and assets classes strongly reminds me of the end of 2019 and beginning of 2020.

My gut tells me that a fear-event is near.  And my gut is being primarily led by current action in the US dollar.  Short positioning in the buck is extraordinary.

Record Short USD Positioning (Dec. 2020)

Yeah, yeah, macro-top-down, commodity bull, central bank largesse, and all that in regards to the USD but this is egregiously exaggerated.  Not that it can’t get more extreme, but consider the following charts.

Seasonality, courtesy of SentimenTrader, tends to be pretty strong in January for the buck.

USD Seasonality - ST (Dec. 2020)

With currencies, large fast moves in a short period are atypical but we live in a time of atypical.  Pairs always have to be acknowledged and the anti-correlation to the euro is at a bit of an extreme.  In the last decade, every time the Euro to USD line (white-monthly) has approached 2 standard deviations above the 25-month MA, then it’s been go-time for a USD rally (green).

Euro vs USD (Dec. 2020)

Does this mean a reversal is imminent?  Nope.  Does it mean additional portfolio hedging here is warranted?  I’d say it’s a prudent use of capital.

The long-term case for the dollar’s demise is well documented.  Goldbugs have been the longstanding voice of fiat destruction, but more recently, Ray Dalio has picked up the baton.  Sam Zell has now officially thrown his name in the dollar-destruction ring with this recent quip.

The single greatest risk that we are dealing with today is the loss of the U.S. dollar as the reserve currency.  If we keep doing what we are doing right now, I think it is 10 or 15 years away.

These investment legends are right.  The USD will in all probability lose 30% to 40% of its reserve status this decade.  And world markets as well as geopolitics will be volatile as a result.

Why do you think Bitcoin has jumped so hard?  That’s institutional fear of central banking monetary policy, not retail FOMO driving Bitcoin.  It’s palpable, but it’s ahead of itself in the USD and Bitcoin.

Nothing moves in a straight line and short-term counter spikes in any trend are as sure as sunrise.  I’m not implying that a fear-event has to rival Covid’s March spikes or we’re at a long-term top in equities.  Just saying that a short-term move to remove some excess is worth hedging at this point.

“It’s not what you don’t know that kills you, it’s what you know for sure that ain’t true.”

I return to this statement over and over as I play the markets.  Mark Twain had unending wisdom.  The speculating public, usually not so much.  November’s stock market returns were a delightful 10% for the S&P 500 and an eye-watering 18% for the Russell 2000; thank you very much hard and fast sector rotation.

Major Indexes November Returns (12-2-2020)

Despite this, ambiguity still reigns supreme currently.  Context is critical.  So does the ambiguity matter to long-term investors?  No.  But if you’re swing trading any asset classes in these markets then the ambiguity matters a whole lot.

Let’s use some simple, classic technical analysis to better illustrate how muddy the waters have become.  We’ll start with the S&P 500.  Depending on your trend-line bias, there’s a few different ways to perceive current action.

SPX Weekly (12-2-2020)

It looks like a very legitimate breakout.  It’s been a hard chop since late July, but I thought we might see yet one more leg down to the high 3100s or low 3200s.  The reason for this was the curious inter-market activity among various asset classes.  Typical correlations weren’t holding up in November and the breakout just felt fake.  But therein lies the problem of using “feel.”  Obviously, I don’t just go with the gut when allocating capital but it has often paid to at least listen to it.

We know that one major, semi-new factor driving markets is option activity.  Never before has one had to care so much about option Greeks to simply trade the underlying.  Observe the enormous rise in single-equity options premiums as a result of the tidal wave of buying, most of that in Calls by retail and institutional.

Buy to Open Calls Spot Premium (10-18-2020)

Options activity has seen market makers make unparalleled purchases in the underlying stocks in order to hedge their Call sales books.  As a result, volatility has chopped right along with the markets as moves have been fast and furious.  So where is volatility possibly headed next?  Again, the trend lines paint a couple of different pictures.

VIX Weekly (12-2-2020)

We have the current liquidity flood and more coming in 2021 to support fund flows into risk assets.  There’s also the beginning of a sector rotational move into value.  I don’t think that’s a done deal yet.  I think growth i.e. tech still has legs left.  I hypothesize that the bounce in energy and small caps is only the first strike of sector rotation, but the growth of SaaS and big tech will soon parry in 2021 which should stunt recent returns in energy and small caps…at least temporarily.

The one asset class that continues to dominate my thoughts is the US dollar.  I’m reading tons of obituaries.  They feel premature.  A swift move up to the 95 area would not surprise me here; swift relative to its usual multi-month cadence.  A “swift-ish” move in the USD would drop a hammer on commodities, which wouldn’t bode well for the recent rotation into energy.

USD Weekly (12-2-2020)

The grains and sugar have been on an unfailing tear upwards.  Typical COT activity would have already seen correlated reversals in these crops.  I’ve seen insinuations that perhaps we’re in a regime change for those specific assets, but like the death of the dollar, that innuendo feels a bit premature.

For my own long-term portfolio of equities, I continue to evaluate the plays that many deem to have great forward looking prospects as not only technology evolves but society as well.  They may seem obvious, but it’s hard to shake what a well chosen play can mean for the potential of a portfolio.  This means gene-editing, cutting edge biotech, AI, data dissemination, and two of the oldest vices on the planet with tremendously long runways as a result of only barely being legitimized.

In the short-term, I think the commodity shorts present a most compelling current opportunity but so much rides on the USD’s anti-correlation.

If you really want to generate some returns with equities, consider after hours trading.  This has been widely reported on for a few years now, but just look at a recent chart put out by Bespoke to truly illustrate the marked difference in strategies.

Bespoke After Hrs. Trading Since Inception (Nov. 2020)

Of course, 2020 has flipped that on it’s head.  See below, but after-hours is starting to reassert it’s dominance.

Bespoke After Hrs. Trading Since Start of 2020 (Nov. 2020)

Stay sharp.  Recent choppy action may not be over just yet.  And with everyone predicting an amazing 2021, including myself, it might just take a little time to get the real momentum going next year.

Hey Gold, Don’t Get Cocky!

Gold Fever - Article Header

Seen this movie?  If not, it appears to be starting another theatrical run.

With the recent action in gold, the precious metals bugs are all stirred up.  Price action has been constructive.  Big time asset management names are mentioning it and the metal is definitely conveying a message.  New songbirds are putting their price calls out there for short-term and long-term destinations.  The old songbirds are putting their same old calls out there as they suffer permanently from the fever.

There’s no fever like gold fever, and I’m an expert in the symptoms.

We’re already seeing the $10,000 and up per oz. calls for gold.  What’s funny is you see the same old reasons for why precious metals are going to boom.  Everybody was selling the same handful of points in the last gold bull run and those same points are being tossed out there again as if they have meaning or truth.

– Negative real interest rates

– Excessive debt loads

– Accommodating monetary policy by central banks

– US Dollar losing value via debasement

– Inflation expectations

– Supply shortcomings

This is folly.  These are not reasons for anything; merely convenient sales pitches that still work on the zealous subset of speculators that are looking for either a reason to stay devoted to the precious metals or believe an amazing amount of money will be made by a small speculation.

From a technical analysis standpoint, it’s time for a rally and the price action hasn’t disappointed thus far.  However, technical analysis has virtually no merit any more due to the advent of the internet.  This has been statistically proven.  Tape-reading still has merit in conjunction with technical analysis and fundamental analysis, but it takes real talent and luck to fight the machines.  Here’s a Captain Obvious chart of gold proving higher prices in the making.

Snarky Gold Chart (7-13-2019)

But there’s only one thing that could potentially drive the price of gold and the precious metals to those high price levels so blithely forecasted.  Here it is in plain, bold English:

A HIGH PERCENTAGE LOSS OF RESERVE STATUS IN THE USD

That’s it.  I believe that to be the only driver that will get gold up over $5,000/oz. or higher.  Something in the order of the USD losing perhaps 35% or more of it’s reserve status which will coincide with decreased use of dollar-settlement in international trade.  Or said another way, chaos.  Because if the rest of the world decides to shift part of the USD’s reserve status to another currency whether it’s gold, Bitcoin, SDR, yuan, etc.; you can bet those in power in the US will be wreaking havoc as a result.  This will be adjoined to the financial/economic chaos that will already be in place.

There still exists old-world faith in the precious metals, and blockchain currencies do not have enough cumulative faith by investors to reel in allocation decisions.  This is the path for significantly higher prices in gold, silver, and the PGM complex; potentially even for the commodity complex.

Regime changes in currency reserves are not fast.  They don’t just happen like a stock market correction.  Many powerful and wealthy nations have a vested interest in the USD maintaining it’s ultimate reserve status.  Just bear that in mind as we watch the dynamics between all asset classes, markets, economies, and countries play out in real time going forward.

It’s tough to visualize if you can’t foresee a world where the USD loses place and face.  But hell, don’t take my word for it.  Google and consider the opinions about the subject of some of the most powerful financial insiders in the world:  Larry Fink – Head of Blackrock, Ray Dalio – Largest principal in the largest hedge fund in the world, and Mark Carney – Head of the Bank of England.

Ain’t no fever like gold fever.  Keep your wits goldbugs.

Bitcoined to Death

September 2nd, 2017 Update:  Depending on when you read this for the first time, how ignorant do I sound as of today with Bitcoin having doubled from the original publishing date of this article?  Not to mention, all the other ICOs since then that are minting millionaires.  My knowledge and experience say this is one of the ultimate bubbles in history.  My brain and heart tell me to make hay while the sun shines.  My ego just calls me an asshole for continuing to miss out.

Have you had enough of Bitcoin and the awe-inspiring wonder of all things blockchain yet?  The blockchain not only cures cancer and AIDS but can make you fly…like Superman.  That’s the hyperbole surrounding cryptos.

“If only I’d just bought 10 bitcoins in 2009!”  Boo hoo.  So you didn’t get rich on Bitcoin.  You probably didn’t get rich on real estate in 2005 or tech stocks in 1999.  The investment world keeps turning.

Never invested in Bitcoin or Ethereum for that matter.  Maybe that makes my opinion irrelevant.

I have read a lot about cryptocurrencies though, specifically Bitcoin.  I missed that train along with the majority of people in the world.  I just can’t wrap my mind around something that isn’t universally accepted that has to be traded on potentially questionable exchanges where competing investments keep cropping up to defeat and dilute the entire concept of the limited-money.  Maybe I just don’t get it.

I do know that blockchain technology will stand the test of time.  The current crypto brands?  I’m not so sure.

My prediction, some sort of scandal or several will avail themselves quite soon causing a sell-off in Bitcoin.  It doesn’t matter whether it’s serious account-hacking somehow or exchange scams, because this sort of pricing will bring out the most intelligent criminals in the world.  And this latest maniacal move up will be entirely erased.  Hope I’m wrong.  Honestly.

Bitcoin YChart (5-28-2017)

Ever ridden the The Dragster at Cedar Point?  Bitcoin owners may be about to experience their own thrill-ride.

                      The Dragster - Cedar Point

If you haven’t hopped on the crypto-train yet and you feel the need to invest in one of the “currencies” in the current price environment, then by all means, indulge.  But consider having a read of these two articles.  One shares the opinion of an experienced player, the other about just one illicit way in which to have your profits harvested from you.

1. http://themacrotourist.com//macro/my-great-bitcoin-bungle

2. https://www.forbes.com/sites/laurashin/2016/12/20/hackers-have-stolen-millions-of-dollars-in-bitcoin-using-only-phone-numbers/#38bad65438ba

To current owners, I wish you well.

The Last Gasp

As you know by now, I think we are in the final stages of the topping process in major markets.  This is going to be a multi-month affair.  I suspect the top and crash begins later next year, but so do many other pundits, pros, and bloggers which makes me leery.  There’s nothing worse than contrarian consensus by large groups in the game of speculation.

Like its predecessors, the crash won’t look like one at first.  Sure, players will get scared and react but then we’ll see a bounce off the first initial move to the downside.  This will be an opportune time to liquidate positions to make a final cash raise to either capitalize during the crash or wait for the inevitable value opportunities that will arise.

There is a set of indicators that go along with this move downward and bounce that has proven efficacy as a guide.  It’s the 5 month and 10 month Exponential Moving Average (“EMA”).  Observe.

SPX - 5 & 10 Crossover (10-10-2016)

These aren’t magic indicators.  I’m not saying they are guaranteed to work.  I’m only saying they’ve proven themselves as guides when a real bear move has begun.  There are a multitude of economic and financial indicators that I also like to use along with anecdotal evidence, too.  Keeping an eye on this particular set of EMAs however can potentially keep your losses to between 10% and 15%, assuming you act.

In a bear market where there’s the potential for a halving of portfolios, I’d say 15% in losses is solid.

Volatility in the biggest asset classes will be unimaginable.  The algorithmic, high frequency trading operations in combination with central banks have broken all markets.  There will be no liquidity for the big timers when the bear begins.

HFTs are the true market makers and all algorithms are written to pull away and sell when bottoms fall out of markets.  Look at the S&P 500 in May of 2010.  That was really the first indication that markets would never liquidate in a typical fashion ever again, until HFTs are properly regulated, taxed, or removed from existence in markets.

There are plenty of examples between May of 2010 and now, but the move in the pound sterling at the start of October provides such a fine illustration.  What’s more liquid than the currency markets of the most developed and powerful Western nations?

Nothing.  And yet still we see the destructive power of HFT on any market.  Does this look normal in a power currency?

Sterling Madness (10-16-2016)

In earlier Asian trading, the intraday damage was even worse.  Observe this bit of madness.

image

These moves are a product of liquidity being immediately vacuumed from the asset classes where all the largest players play.  This will happen again and again when the markets make their final turn.

You can liken it to a hull breach for an astronaut in space without a suit on.  One second astronaut HYG is floating around the lab in a jump suit, happily conducting experiments with OPM.  But OPM in high-yield instruments in a low-yield environment can be a volatile material if not handled appropriately in a proper setting and an explosion occurs breaching the hull, sucking HYG out into the liquidity-free vacuum immediately to death.

Did I say liquidity?  I meant oxygen.

You get the point.

Coming back to what a last gasp means; it means there will be a final run in risk assets to squeeze out the final profits of this bull.  Many, including myself, have called it a melt-up, but I grow weary of the term.

Please don’t be fooled by some of the ignorance being freely proffered out there that we are in the early years of a cyclical bull, similar to 1982.  We are not.  The evidence is broad, clear, deep, and obvious.  One needn’t a fancy finance degree or years managing wealth in order to see this.

The end game is here, but not before that last gasp for profits that I keep describing.  I suspect that many of the sectors that powered this bull market prior to 2016 may reassert themselves to take us home.  Why is that?

Interest rates.  Plain and simple.

Those with access to leverage at these historically low rates will borrow capital to fund buyouts and takeovers which will drive asset prices upward.  The upward move will then draw in speculators looking to hop on the trend or front-run it.  This quest for yield whether in debt, equity, or private equity i.e. IRR, will be the fuel for the last gasp up in asset prices.

Despite what I think may happen in semiconductors or social or biotech or emerging markets as risk-on gains speed, keep your eyes on the one asset class that has taken out all comers in 2016.  The Rocky Balboa asset class for the year.  You know what I’m referring to and this is even with the recent sell-off.

2016 Performance Chart (10-16-2016)

Precious metals.  You don’t have to love them or hate them.  Opinions don’t have to be binary.  Be agnostic when speculating.  Follow the trends.  Follow the money.  More importantly, follow central banking and political lunacy.

Let’s look at one more chart that potentially validates that this bull market is long in the tooth.  It depicts the times over the last 50 years when payouts to equity investors have exceeded  profits.

Total Payouts via ZH (10-11-2016)

You can ignore what is glaringly obvious or you can prepare.

Speaking of obvious, let’s begin to wrap this post up with another pithy little ditty of a quote, this time from one of the world’s great speculators.  It’s been reprinted time and again, but it’s simple yet brilliant message is timeless.

I just wait until there is money lying in the corner, and all I have to do is go over there and pick it up.  I do nothing in the meantime.

– Jim Rogers

I haven’t touched on trading since the summer and I just wanted to share some set-ups that appear to potentially be building little piles of money in a corner waiting to be picked up.

Keep an eye on these sectors, either short or long:

Short:  sugar, energy(big 3), US dollar, and technology

Long:  grains, bouncing precious metals, and the pound sterling

Despite your opinions, never forget about counter-trend rallies, even in the face of what appears to be an unstoppable trend.